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Keynesian Theory Features

Some of the basic features of Keynes theory of income and employment are as follows:

1. Output, employment and income are interchangeable terms.

2. Employment and income depend on effective demand.

3. Effective demand is governed by aggregate demand and aggregate supply.

4. Since aggregate supply remains constant in the short-run. Keynes concentrates on the aggregate demand.

5. Aggregate demand in a two sector economy (i.e., households and firms) is determined by consumption expenditure and investment expenditure.

6. Consumption expenditure is determined by (i) the size of income, and (ii) propensity to consume.

7. Propensity to consume may be of two kinds:

(i) Average propensity to consume and (ii) Marginal propensity to consume.

8. The propensity to consume is relatively stable.

9. If the propensity to consume remains unchanged, employment depends upon the investment expenditure.

10. Investment depends upon (i) the rate of interest, and (ii) the marginal efficiency of capital.

11. Marginal efficiency of capital, in turn, is determined by (i) supply price of capital asset, and (ii) prospective yield from the capital asset.

12. The rate of interest is determined by (i) the supply of money, and (ii) the demand for money. The demand for money depends upon the liquidity preference.

13. The liquidity preference is determined by three motives: (i) Transaction motive, (ii) Precautionary motive, and (iii) Speculative motive. The supply of money is controlled by the government.