According to views of a Keynesian macroeconomist, if the economy at any stage is left isolated, there are minimal chances that the concerned economy will operate at full employment rate. To attain this standard of full employment, it is imperative that the monetary and fiscal policy of the country is managed at utmost levels, and there is an adequate parity between both of them. Only when this is done, it would be evident that level of full employment is at the highest.
Derived from the views of John Maynard Keynes, this theory is specifically associated with specific forces that determine the level of aggregate demand as well as aggregate supply in a short run stance.
Fluctuations in terms of aggregate demand:
In this format, it needs to be taken into account that expectations that are placed on a particular format, needs to take into account the standards of aggregate demand that is to be assumed in a specific market.
If the future profits do not provide any good signs, it may so happen that aggregate demand amount that is being taken into consideration would reduce comparatively and result in fall of aggregate demand. This on the whole would result in putting the economy into a sense of depression and hence, there is no growth in the economy in this regard.
Response of the market in regards to aggregate supply:
When the Keynesian view is taken into consideration, the aggregate supply curve that is taken into consideration is taken to be as placed beyond the standards of monetary wage rate. So, with time, the money wage rate that is present does not reduce in any manner.
So, with time, there has to be a certain amount of gap in regards to recession and therefore, it has to be dealt with in a natural manner. There is no external mechanism that deals with it in a proper manner and hence, chances of a fall in wage rate are high. This sudden fall in terms of wage rate helps in increasing the rate of aggregate supply on a short term basis and hence it would result a loss in monetary wage rate as well as employment levels.
But if taken on a long term context, it is important to note that reduction in rate of monetary wage would further result in gaining that level of full employment and increase in the aggregate supply on a short term scale. Therefore this would result in not lowering of the monetary wage rate and further economy being within a standard of recession.
According to the theory placed by the views of new Keynesian theory, it can be seen that both prices of goods and services as well as money wage rate are sticky and therefore when placed against this sticky monetary level, curve that is framed as part of aggregate supply on a short term basis is taken to be on a horizontal basis and that too on a fixed price level. When these details are fulfilled it can be stated to be an ideal condition when placed on a Keynesian model.
Demand for a correct response to policies framed:
As per the Keynesian policy is concerned, there are certain monetary and fiscal policies that are associated with it, that helps in ensuring a sense of aggregate demand bringing in a certain sense of recession within the economy.
In such a scenario where recession is prevalent, it can be seen that a certain amount of change if made in regards to aggregate demand amount, the whole situation of full employment can be restored in the economy.
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