The Keynesian Theory

The Keynesian Theory - The Keynesian Theory

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The Keynesian Theory Keynes's theory of the determination of equilibrium real GDP, employment, and prices focuses on the  relationship between aggregate income and expenditure. Keynes used his  income-expenditure  model to argue that the economy's equilibrium level of output or real GDP may not corresPond to the  natural level of real GDP. In the income-expenditure model, the equilibrium level of real GDP is the  level of real GDP that is consistent with the current level of aggregate expenditure. If the current level  of aggregate expenditure is not sufficient to purchase all of the real GDP supplied, output will be cut  back until the level of real GDP is equal to the level of aggregate expenditure. Hence, if the current  level of aggregate expenditure is not sufficient to purchase the  natural  level of real GDP, then the  equilibrium level of real GDP will lie somewhere 
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