keynes analysis

• An economy can get stuck in unemployment equilibrium with GDP below full employment level of income because aggregate demand is insufficient to generate a full employment level of income. The lack of aggregate demand could be because of lack of consumer and business confidence can lead to low consumer expenditure or low investment expenditure. capitalist system might not be able to achieve full employment.
• Keynes argued that increased government expenditure might give a very powerful boost to the economy especially because of the associated multiplier effect. Hence there may be an important role for governments in macroeconomic management
• However analysis only deals with closed economy ignores imports and balance of payment problems, assuming money, wages and prices are fixed following an increase in aggregate demand. Running fiscal deficits financed by borrowing from financial market might be alright in short run but in long run will increase national debt. assumed economic agents and financial markets will not be worried by increased government expenditure and any fiscal deficits