Under this model, all the firms are taken as grocery stores, where they pre-set the price range and sell the amount they think the customers will buy. They increase their prices if they continuously keep selling a larger amount than they perceived to have sold. Likewise, they reduce the price range if they constantly go about selling a much lesser amount than they were supposed to have sold in the first place. But it goes without saying that demand is the main component here, the amount they sell doesn’t depend on supply, with the prices being fixed.
Considering that the economy is one and whole and the prices are fixed in nature, two aspects come into light:
- Price level is fixed and constant
- The real GDP depends on Total Demand
The Keynesian Model offers that change in the quantity of overall demand, when the price is fixed in nature, by categorizing the factors which determines expenditure plans.