16466 Chapter Notes - Chapter 24: John Maynard Keynes, Output Gap, Aggregate Demand
Document Summary
In the 1930s the great depression showed the classical economy did not always work. Wages and prices fell but so did employment and output. The economy was not correcting itself and the depression continued for many years: the idea that governments should implement policies to increase aggregate demand, and thus boost output and employment, was developed by john maynard keynes, an. English economist, and published in 1936: he argued that recessionary gaps were due to insufficient aggregate demand and monetary policy and government spending should be used to increase output. In a classical economy the link between monetary policy and aggregate demand is direct, as a change in the interest rate flows straight through to aggregate demand. In a keynesian economy the link between monetary policy and aggregate demand is indirect: the interest rate affects decisions on savings and investment.
