What is a Simple Keynesian Model?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

According to the Simple Keynesian Model, a decline in aggregate demand might result in a stable equilibrium with high unemployment. The Keynesian Cross is yet another name for it. The straightforward Keynesian model demonstrates its capacity to illustrate that a stable balance at less than full employment is possible.

Simple Keynesian Model (SKM)

The tenets of Keynesian theory are as follows. Unemployment may develop during a recession as prices, and salaries may remain stagnant. It is because aggregate demand is more likely than aggregate supply; this primarily causes a short-run economic event like a recession.

  • Keynes contended that lengthy periods of high unemployment could result from a lack of overall demand.
  • The fundamental tenet of Keynesian theory is that business and Economic Growth will be fostered if overall investment levels in a nation or society are higher than overall savings rates.
  • According to Keynesian economic theory, four factors—consumption, investment, government purchases, and net exports—determine how many goods and services an economy produces.
  • The “demand-side” theory of Keynesian economics emphasizes how the economy is changing.
  • In the 1930s, British economist John Maynard Keynes created the Keynesian theory of economics to explain the Great Depression.

In the SKM, the condition for equilibrium can be expressed as Y = C + I + G.The equality between Y, which defines income, and C + I + G, which depicts total expenditures (or aggregate demand).


What is a Simple Keynesian model?

According to the Simple Keynesian Model, decreasing aggregate demand could lead to a stable equilibrium with significant unemployment. The Keynesian Cross is ultimately another term for it. The simple Keynesian model shows its ability to demonstrate the possibility of a stable equilibrium at less than full employment.

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