The Great Depression during 1929 to 1933 brought a steep decline in economic activities. This deep rooted depression became worldwide though initially it appeared in United States of America (USA). General Price level continued to fall.
This led to the fall in employment, output and income. In USA unemployment rose from 3.2 percent in 1929 to 25.2 percent in 1933. Gross National product fell by 30.0 percent and could not be recovered until 1939.
This led to a debate among economists. The debate was over the causes of unemployment John Maynard Keynes, a noted British economist, participated in the debate and rejected the classical belief of full employment.
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He published his book entitled ‘The General Theory of Employment, Interest and Money’ in 1936. He pointed out that full employment is not the normal feature of the economy.
Underemployment and unemployment may exist in an economy. In his book entitled ‘The General Theory of Employment, Interest and Money’ and this book popularly known as “General Theory” he presented the theory of employment.
Keynes held that the level of income and output depends upon the level of employment. So his theory of employment is same as his theory of income and output determination. However, to cure unemployment he suggested some policy prescriptions which well responded to recover from the depth of depression.
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Now let us analyse the basic elements of Keynesian model of Income determination. He has developed two concepts like aggregate demand and aggregate supply (or aggregate income and aggregate expenditure) to determine equilibrium level of income and output.
Aggregate demand is aggregate expenditure of final goods and services produced for use in an economy during a given time period. Keynes has strongly recommended for increasing the aggregate demand to bring a change in employment and level of income.