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Basis of Keynes Theory
1. The national income is equal to the volume of total
employment.
2. Total volume of employment depends upon and originates
from the level of effective demand in the economy.
3. Effective demand is composed of two elements. ADF
(Aggregate Demand Function), ASF (Aggregate supply function).
4. Effective demand is determinant by the equilibrium
point of ADF and ASF.
5. Keynes assumed that Aggregate supply function to be
given in the short period and regard in Aggregate Demand Function as the most
significant element in his theory.
6. ADF is composed of consumption function and investment
function.
7. The consumption function or the consumption
expenditure is determinant by Size of income and Propensity of consume. Keynes
assumed that Consumption function is always given in a short period.
8. The investment function depends on two factor.-
Marginal Efficiency of Capital, Rate of Interest.
9. Marginal Efficiency of Capital is determinant by
Prospective yield of Capital Assets or Supply price of Capital Assets.
10.
Keynes assumed
that Marginal Efficiency of Capital is highly fluctuating.
- The Rate of Interest depends on Liquidity preferences income and quantity of Money. Keynes assumed that Rate of Interest is stable in short run.
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