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Prices such as wages are often slow to respond to changes in demand and supply.However, the negative impact of private decision-making can be mitigated through government intervention with a fiscal or monetary stimulus. For example, a decrease in aggregate spending can bring the economy into a recession. The level of demand by the private sector could exert an effect on macroeconomic conditions. Aggregate demand is influenced by the decisions in the private and public sector.

The three main components of the Keynesian Theory are: The thinking went against the existing classical economic policy of laissez-faire and minimal government interference. In response to widespread unemployment and low levels of economic activity across the world, Keynes called for an increase in government spending in order to boost demand for goods and services in the market. The General Theory was intended not just for economists but also for policymakers across the world.

The main idea put forth by Keynes in The General Theory was that recessions and depressions could occur because of inadequate demand in the market for goods and services. The book attempted to explain short-term economic fluctuations in general, especially the fluctuations observed during the Great Depression in the early 1930s. Titled “The General Theory of Employment, Interest, and Money,” or simply as “The General Theory,” it is considered one of the classical works in economics. In 1936, economist John Maynard Keynes published a text that would change the course of economic thought. Therefore, if private consumption expenditure increases by 10 units, the total GDP will increase by more than 10 units. The Keynesian Multiplier is an economic theory that asserts that an increase in private consumption expenditure, investment expenditure, or net government spending (gross government spending – government tax revenue) raises the total Gross Domestic Product (GDP) by more than the amount of the increase.

Updated ApWhat is the Keynesian Multiplier?