Keynesian Macroeconomic Theory

The underlying principle of the Keynesian theory of national income and employment is the effective demand principle, which is explained in an expenditure—income scheme where equality of aggregate demand and aggregate supply of goods is defined in terms of equality of aggregate expenditure and national income, both in real terms. A distinction between autonomous components and those depending on income makes it possible to conceive of situations where there is insufficient effective demand, and consequently, underemployment equilibria. The aggregate demand is assumed to be the sum only of consumption and investments and the demand for consumption is assumed to depend on real income. Investment is assumed to depend on variables other than real income (namely the interest rate).