1) John Maynard Keynes developed the Keynesian school of economics in response to the Great Depression. His major work, The General Theory of Employment, Interest and Money, argued that government intervention was needed to increase aggregate demand and pull the economy out of recession. 2) Keynes argued that Say's Law did not always hold, and that unemployment could persist if aggregate demand was insufficient. He advocated for fiscal policy tools like government spending and tax cuts to boost effective demand. 3) The Keynesian school emphasized macroeconomics, instability in the economy, and advocated for active fiscal and monetary policies by the government to promote full employment and economic growth.

1. CHAPTER FOUR
THE KEYNESIAN ECONOMICS

2. John Maynard Keynes (1883-1946)
• The General Theory of
Employment, Interest and
Money (1936)
• A Treatise on Money (1930)

3. The school is :
• The most significant schools of economic
thought.
• Began with the publication of Keynes’s The
General Theory of Employment, Interest and
Money in 1936 and remains a major presence in
orthodox economics today.
• In this chapter, we provide a brief overview of the
Keynesian school and discuss JOHN MAYNARD
KEYNES ’s major ideas.

4. The Historical Background of the
Keynesian School
• The Great Depression of the 1930`s.
• The work of many economists was within the
framework of aggregate economics, or macro, rather
than the micro of the neo-classical school.
• The spreading concern about secular stagnation(a
condition of negligible or no economic growth in a
market-based economy), or a declining rate of growth.
• The mature private-enterprise economies of the
Western world were less vigorous after World War I
than before it. The rate of population growth was
declining; most of the world had already been
colonized.

5. Major Tenets of the Keynesian School
• Macroeconomic emphasis: Keynes and his followers concerned
themselves with the determinants of the total or aggregate
amounts of consumption, saving, income, output, and
employment.
• Demand orientation: Keynesian economists stressed the
importance of effective demand (now called aggregate
expenditures) as the immediate determinant of national income, output,
and employment.
• Instability in the economy: According to Keynesians, the
economy is given to recurring booms and busts because the
level of planned investment spending is erratic. Equilibrium
levels of investment and saving exist after all adjustments
have occurred.

6. Cont…
• Wage and price rigidity: Keynesians pointed out
that wages tend to be inflexible downward
because of such institutional factors as union
contracts, minimum wage laws, and implicit
contracts (understandings between employers
and their workers that wages will not be cut
during downturns judged to be temporary).
• Prices also are sticky downward; declines in
effective demand initially cause reductions in
output and employment rather than declines in
the price level.

7. Cont….
• Active fiscal and monetary policies: Keynesian
economists advocated that the government
should intervene actively through appropriate
fiscal and monetary policies to promote full
employment, price stability, and economic
growth.

8. Whom Did the Keynesian School
Benefit or Seek to Benefit?
• Consumers in general looked favorably on tax cuts and
supported politicians who suggested and voted for
them.
• Farmers long had favored easy monetary policies and
low interest rates
• It addressed a pressing problem of its day: depression
and unemployment for the society.
• Business firms benefited from government contracts
and government stimuli to get the economy out of
depression or recession.
• Those who need the setup of government i.e. unions….

9. How Was the Keynesian School Valid,
Useful, or Correct in Its Time?
• Keynes geared economic theory to policymaking.
• World wars, worldwide depressions, and the growing
complications of modern life undermined laissez-faire.
• Demands that something be done about business
fluctuations grew more insistent, and Keynes provided
both an explanation of fluctuations and a program to
mitigate them.
• The role of economists and economic analysis in
shaping the direction of government policy was thus
greatly increased.
• A deep and general reduction of nominal wages makes
for bad economic policy.

10. Cont…
• It established a new set of analytical tools
through which to view the economy,
encouraged the further development of
national income accounting, hastened the
development of econometrics, and created a
new liberalism on which reformers could pin
their hopes for aiding those who benefited
least from unfettered capitalism.

11. Which Tenets of the Keynesian School
Became Lasting Contributions?
• Numerous ideas developed by Keynes and his followers
towards the developments of contemporary
macroeconomics .
• Keynesian concepts such as the consumption function;
the marginal propensity to consume; the saving
function; the marginal propensity to save; the marginal
efficiency of capital; the transaction, precautionary,
and speculative demands for money; the multiplier; ex
post and ex ante saving and investment; fiscal and
monetary policy; IS-LM analysis.

12. J.M Keynes (1883-1946)

13. Life of Keynes
•John Maynard Keynes was the son of John Neville Keynes
(1852– 1946), himself a distinguished economist and
colleague of Marshall’s at the University of Cambridge.
• He was the governor of IMF and IBRD. He died on April 21,46
• He took his first degree in Mathematics from King’s College,
Cambridge (England).
• He studied economics under Marshall and Pigou at
Cambridge and was leading figure in economics at Cambridge
at a time when Cambridge emerged as the center of the
economics universe.
• Keynes served in numerous ways as an advisor to
gov’ts and governmental committees throughout his career,
and was one of the architects of the post Second World War
international monetary system.

14. • By the time of the Great Depression, Keynes had
become one of the world’s great economists,
perhaps its leading monetary theorist.
•However, even before 1920’s he held many then-
unorthodox views.
• His career, however, was by no means confined to
the academic cloisters(arch).
• As a result of his book Indian Currency and Finance
(1913) he was appointed to a Royal Commission to
examine Indian currency.
• In 1925, he married Lydia Lopokova(russian)

15. • In 1932 he published a two-volume “Treatise on
Money” a widely acclaimed masterpiece, which was, in
many respects, to develop the ideas which formed the
basis of his magnum opus - The General Theory of
Employment, Interest and Money – in 1936.
• But it is usually known as his General Theory and it is
accepted that its main concern is with the first of the
trinity of topics in the title, i.e., employment.
• Why had Keynes made the determination of the level
of employment his main concern?
• Keynes’s target in General Theory was traditional
monetary and macroeconomic theory, cantering on the
rejection of Say’s Law and extending the revision of the
quantity theory of money .
• Keynes’s new theory was important in several ways:

16. 1) He provided an extensive theory of the determination
of the levels of income, output, and employment, as
well as of the price level which constituted his version
of that analysis.
2) He had a more complex, and even quite radical, view of
saving than hitherto(previously) held.
• He argued that investment is financed not only by
house hold saving but also through bank credit and
retained earnings.
• Besides, the economic significance of any level of
savings depend on its relation to its correlative level of
investment.
• That is, if saving exceeded investment, the level of
economic activity was likely to contract, and vice versa.

17. 3)He argued that the role of the interest rate was not
to equate saving and investment but something like
the demand and supply of money, taking especial
account of the demand to hold money (liquidity
preference).
4) He maintained that government spending was part
of the income mechanism and raised the theoretical
and practical-policy possibilities of using the
relation of government spending to taxation as a
means of countering or compensating for
developments in the private sector deemed
undesirable, for example, unemployment and
inflation.

18. .
• Keynes did not believe that existing economic theory,
with its strong laissez-faire bias, was capable of
providing the remedy for this over-whelming economic
and social malaise of the late 1920’s and early 1930s.
• The Marxists, he saw, were expressing confidence in
their founder's prediction that capitalism was doomed
by its inner contradictions, and were expecting its final
collapse at any moment. Keynes did not accept this
view.
• In fact It could be urged that his General Theory is
aimed as much at disproving Marxism, as disproving
the laissez-faire approach.
• He recognized that unless a new economic theory could
be formulated, which gave hope to thousands of
disillusioned(disappointed) citizens, then Marxist
ideology might well triumph(success).

19. • Keynes directed his attack on the body of theory
deriving from Say's law.
• Broadly speaking the Say’s Law argued that, given
time, unemployment would be cured by the normal
operation of supply and demand.
• J. B. Say had argued that general overproduction
and unemployment could not persist because
supply creates its own demand.
• The supply of products in particular industries may
temporarily outrun the demand for the products of
those industries, if entrepreneurs misjudge the
demand for their goods.
• But in Say's view, general over-production is
impossible.

20. The Great Depression…
• The classical or neoclassical theories implied full-
employment.
• After all, if there are any unemployed people they
would offer to work for less and, therefore, get
hired.
• The wage would keep decreasing till all willing
workers are hired.
• If the wage occasionally gets stuck at too high level,
unemployment would result.
• However, such episodes would be brief because the
presence of the unemployed would push wages
down.

21. • But the Great Depression (1929-39) was a period of
prolonged high unemployment that the classical
theory could not explain.
• Therefore, it was the Great Depression that exposed
a major weakness in the classical theory.
• Moreover, Keynes made an informal argument that
even if the wage fell, there was no guarantee that
the unemployed would be hired.
–If wages fell, the workers would be poorer and
would cut back on their shopping.
–This would lead to a fall in the prices of goods.
–As a result, businesses would not find it viable to
hire more workers;

22. Effective Demand
• As wage reductions could not be relied upon to
encourage more hiring by businesses, some other
strategy was needed.
• Keynes suggested expansionary fiscal policy also
called ‘pump priming’ as the cure.
• If the government starts spending more on, say,
new roads and bridges this would directly create
more jobs and reduce unemployment.
• If the government cuts taxes, people would have
more spending money and would go shopping.
• This would raise the prices of goods and induce
businesses to hire the unemployed.

23. Interest Rate and Money
• According to Keynes there are two important factors
that affect investment decision:
1) Expected return on the investment 2) Rate of interest
• The former constitutes the benefits from investing in
new plant and equipment; the latter constitutes the
cost of obtaining funds to purchase the plant and
equipment.
• If the expected rate of return on investment exceeded
the interest rate, business firms will expand.
• However, if interest rates exceeded the expected rate of
return on investment, that investment will not take
place.
• Thus, changes in expectations and changes in interest
rates lead to changes in business investment

24. • When business owners are optimistic about the
economy, they will expect high rates of return on
money used to build new plants and equipment.
• However, when pessimism sets in, little new plant is
going to be built.
• Keynes in his famous pieces “General Theory” he
discussed how interest rate is determined.
• The interest rate was determined, according to
Keynes, in money markets where people and
businesses demand money and where central banks
control the money supply

25. • The demand for money came from portfolio decisions
made by people and businesses.
• They could hold money or they could hold their wealth
in the form of stocks, bonds and other assets.
• In general theory Keynes argued that interest rate is
purely a monetary phenomena determined by liquidity
preference.
• Unlike the Classical economists where interest rate is
regarded as the main determinant of saving, Keynes
argued that it is income not interest rate which mainly
affect the saving decision and saving does not always
respond smoothly and easily to the change in demand
for capital.
• To the transactions motive for holding money, Keynes
added the precautionary and speculative motives, the
last being sensitive to the rate of interest.

26. .
• By introducing the speculative motive into the
money demand function, Keynes made the rate of
interest dependent on the state of confidence as
well as the money supply.
• Keynes disputed (uncertain) the view that the
interest rate would equilibrate savings &
investment.

27. Keynes system
 The formulation of Consumption function:
C =f (Y ), C = α+βY, he argued that consumption determines
demand in turn leads to production of commodities as well
capital. It is the lack of effective DD or lagging consumption that
creates crises and generates depression. He conjectured that:
• (MPC)—is positive and less than one.
• Income is the main determinant.
• APC falls as income gets larger.
 Saving determination:
S=f (Y ), This implies that saving (S) also rises with income; it, too, is a
positive function of income.
• Like the MPC, the marginal propensity to save (MPS) is greater than zero
and less than one.

28. .
Investment: Keynes defined economic investment as
the purchase of capital goods.
I = f(r), I = α-βr. The inducement to invest depends
on marginal efficiency of capital and interest rate.
Equilibrium income and employment: there is a high
correlation between national income and the level
of employment. Keynes, however, was concerned
mainly with the short run; he defended this
emphasis with the quip, “In the long run we are all
dead.
If we ignore the government and international trade,
the immediate determinants of income and
employment are

29. .
• Y= C+I, and S = Y-C then, Solving the two
equations provides an alternative condition for
equilibrium income: S = I, the question now
arises: why S = I?, if I disappear owing to hoarding
= total spending decrease leads to a fall in Y and
C. on the other hand if the entire income is spent
on C further expansion of employment and I is
not possible results smaller output and Y. Hence a
balance b/n C & I is essential. S is a part of
income w/c is neither hoarded nor is used for C.
hence S must be invested & that is why keynes
hold S=I.

30. Policies to promote full employment and stability
• Keynes proposed a large government role to stabilize
the economy at a full employment level of national
income. To combat high unemp`t, Keynes suggested
ways to increase aggregate expenditures. For
example, the government should stimulate private
inv`t during a depression by forcing down the rate of
interest, which could be accomplished through a
central bank policy.
• Because of liquidity trap, monetary policy is not
likely to be effective as a way to reduce interest rates
and increase investment spending during a severe
depression. i.e. Any new money pumped into the economy by the
central bank will be held by people as idle balances rather than used to
buy bonds, and the interest rate will not fall.

31. .
• A second and more effective way to overcome
depression is for the government to undertake
an expansionary fiscal policy. Government
spending, like private investment, serves as a
source of aggregate expenditures. Such
spending, declared Keynes, could be increased,
thereby increasing aggregate expenditures and
producing a multiple increase in national
income

32. Keynes’ theory of liquidity Preference
• Keynes describes 'liquidity preference' (the demand
for money) as depending on three motives
I) the transactions motive (the need to pay for things -
whether as consumer or businessman - at short
notice); the daily needs of life.
II) The precautionary motive (as a guard against
accidents, unemployment, ill health and all the
uncertainties of life); contingent needs.
III) The speculative motive (a readiness for profitable
opportunities). Business needs.
 Liquidity preference is preference of an individual or
group for cash over assets and determine interest
rate.

33. • Keynes argued, sensible wealth management
required that people hang on to some cash even if
they don’t need it for shopping.
• Moreover, Keynes’s liquidity preference idea
implied that the demand for money would be
inversely related to the interest rate.
• Keynes demonstrated that the pursuit of liquidity
(i.e., the desire for large cash holdings) could cause
a reduction in spending and thereby in national
income, production, and employment.
• He uses the idea of liquidity to drive a final nail in
the coffin of Say's Law, and demonstrates that it
was possible for people to save too much

34. The concept of Multiplier
• Apart from the direct effects of expansionary fiscal
policy on employment, according to Keynes there
would also be a chain of indirect effects.
• If one set of unemployed workers get hired, they would
have some extra money in their pockets.
• Therefore, they would go shopping.
• This would induce businesses to hire some more of the
unemployed.
• These workers would, therefore, have some extra
shopping money and their shopping would similarly
create more jobs.
• And so on and on the process would go, creating more
and more jobs.

35. • As a result of this chain effect—called the
multiplier—a $10 million increase in government
spending would end up adding to GDP by not $10
million but by a multiple of $10 million.
GDP=C+I+G+NX
• Ceteris paribus, the multiplier will be larger, the
larger the marginal propensity to consume.
• In another word, the less thrifty the workers were
the bigger would be the number of additional jobs
created by expansionary fiscal policy.
• Keynes borrowed this idea from his contemporaries,
Richard Kahn and Ralph Hawtrey.

36. Theory of Employment and Price
• In Keynes’ vision, the most serious consequence of
the economic crisis was represented by the fast
growing rate of unemployment which directly
affected the welfare and peace of society.
• For this reason, the main purpose of Keynes was to
solve once and for all the problem of occupation
and the solution proposed was a bold one and
apparently, innovative: the state had to indirectly
intervene in the economic activity:
by stimulating aggregate demand
by means of manipulating the interest rate and
control of monetary mass.

37. • Being perfectly aware of the role that prices play in
the economic system, John Maynard Keynes
devotes an entire chapter out of The General
Theory of Employment, Interest and Money to the
theory of price.
• In the theory of price, Keynes argued that the level
of prices on one market is determined by the cost
of production factors and production level (SS).
• According to Keynes the level of wages, that is, the
price of labor is an essential factor in establishing
final price.

38. • The traditional microeconomics assumes prices
flexibility as an essential characteristic of general
equilibrium.
• The Walrasian general equilibrium model is based on
the prices ability to freely float until the supply and
demand are met on each particular market and, thus,
the entire economic system is in an equilibrium status.
• Keynes criticized this traditional assumption arguing:
 first that on a short term prices are not as flexible as the
traditional economics assumes and,
 second, prices flexibility is not by far the most important
condition for general equilibrium.
• Keynes’s only argument why prices are not flexible in
the short term is b/c of the rigidity of nominal wage.

39. • For the classical economics, a nominal wage falling
will produce a cost cut and consequently, a price
reduction which will determine the employment to
increase.
• Keynes is yet skeptical on this theory which is, for
him, too simplified.
• According to Keynes, classical economics is relevant
for individual industry and firm analysis, valid for
partial equilibrium and not general equilibrium.
• Keynes argued that unemployment equilibrium is
normal.
• Economy operates less often than full employment,
since market do not clear.

40. Wage Rigidity
• Keynes argued that wages might not be driven
down by the unemployed.
– Wages in some cases are fixed by long-term
contracts.
– Moreover, workers suffer ‘wage illusion’.
• That is, they would refuse to accept wage cuts but
happily accept price increases even though both these
changes reduce the purchasing power of the wage (or,
the real wage).

41. Stabilization Policy
• Thus, we see that Keynes had proposed two
cures for unemployment:
– expansionary fiscal policy, and
– expansionary monetary policy.
• However, of these two cures, Keynes preferred
expansionary fiscal policy and had doubts
about the effectiveness of monetary policy.

42. Doubts about monetary policy
• First, Keynes argued that at especially low interest rates a
liquidity trap may appear.
– That is, the demand for money may become infinitely elastic
and, therefore, it may no longer be possible to reduce interest
rates by printing more money.
• Second, even if you reduce interest rates, investment
spending by businesses may not increase.
– Business investment is determined basically by expectations—
optimistic or pessimistic “animal spirits”—and only slightly by
the interest rate.
– Therefore, when the economy is in trouble, even if the central
bank succeeds in reducing interest rates, the businesses may be
so pessimistic that they may not boost investment spending.
And if that happens, no new jobs would get created.

43. Classical Economics Vs Keynesian Economics
Classical
• Economy is always in full employment.
• Wage and interest flexibilities restores full
employment equilibrium, if disturbed.
• Monetary expansion may create inflation.
• Interest rate brings about equality between
Savings and investment
• Investment is interest elastic.

44. Keynesian
• Full employment equilibrium is an exception.
• General reduction in wages throughout the
economy can lead to fall in demand
• inflation will arise only after full employment has
been achieved.
• Savings & investment is influenced by level of
income and expected return on investment.
• Interest sensitivity of investment may not be
adequate.

45. • Classical place great emphasis on supply side for
establishing equilibrium.
• S & I decisions are made by same group of people
and interest rate brings about equality between I
&S
• Keynes treats supply (Y) as given and attaches great
significance to demand .
• S & I decisions are taken by different groups of
people changes in the economy are the result of
changes in income and expenditure and not the
rate of interest rate

46. • Classical economics focuses on long run analysis.
• Keynes emphasized on short run . “In the long run we
are all dead”
• In classical economics wage and prices are fully flexible
in order to clear markets rapidly.
• In Keynesian economics both price and nominal wages
are rigid In the short run.
• In classical world free market economies are always
stable. Tending towards full employment & full
production equilibrium
• In Keynesian economics, free market economies are
unstable
• Equilibrium but no reason for full employment/full
production

47. In Keynesian economics,
• In a depression or recession, much unemployment is
involuntary.
• Economy operates less than full employment, since
market don’t clear.
• Government intervention is desirable to stabilize the
business cycle.
• (Fiscal and monetary policies but he cast doubt on the
effectives of monetary policy)
• Demand becomes much bigger driving force
• Under Classical system , however, government had no
role in management of the economy- “Laissez faire” do
nothing.

48. • Keynes believe that aggregate supply will always
adjust to Aggregate demand not vice versa.
• According to Keynes; Demand creates its own
supply and not supply which create its own demand
as it was the case in the Classical Say’s Law.

49. .
• Keynes analysis of wage and employment can be
regarded as revolutionary than classical.
• Keynes integrates the theories of money,
employment and interest with income/output
theory and concept of money is more dynamic
than classical.
• Keynesian economics is more practical and
effective than the classical economics. It is
institutional in the sense that it gives due
importance to institutional factors explaining high
rates of interest, inadequate supplies of money,
over saving, cumulative errors, uncertainties,
rigidities, etc..

50. Policy Implication of Keynesian Economics
• In Keynesian economics the focus is on aggregate
demand.
• It focuses on the rate of spending in the economy.
Spending is what pulls forth the output, and thus
supports employment and incomes.
• Keynesian economics tells us that if we can
understand what determines the level of spending
(aggregate demand), we will know what determines
the level of employment and production; i.e., of
output and income in the economy.

51. • Keynesian economics offers the government a positive
approach to overcome depression.
• Make total spending increase and the economy will
speed up.
• Increase government spending. Cut taxes so people and
businesses will have more money to spend. Permit the
money supply to expand.
• As the government and the businesses and people all
spend more, people will receive more income.
• As people’s incomes increase, their spending increases.
• The result will be prosperity. If ,on the other hand, the
economy overheats, soon the government will need to
cut down on its spending and raise taxes to keep the
boom from running away into inflation.

52. • The basic idea of the Keynesian proposal for
overcoming unemployment and depression was to
unbalance the budget.
• The government would reduce its “tax
withdrawals” from the income stream at the same
time that it would increase its “spending
injections” into the income stream.
• The idea was for the government to unbalance the
budget, run a deficit, create more money to
finance its expenditures, and thereby push more
money into the spending and income flow of the
economy.

53. • In the sphere of public policy, Keynes came to rival (and
perhaps even out-strip) of Adam Smith in his influence
on statement and administrator.
• The influence of the Keynesian theories on the
formulation of public policies in the various countries of
the world can hardly be over emphasized. His
contributions, chiefly relate to the solution of the
following problems: reparations, exchange rates,
international equilibrium, appropriate rate of interest,
central banking system, inflation, deflation and wastage
of economic resources and employment.
• Keynes suggest that sound policy of public finance
should aim: keeping the rate of interest as low as to
force capital to undertake investment risks in order to
earn profits; supplementing private inv`t by gov`t
spending; and adopting progressive taxing system.

54. • While Keynesian economics was widely accepted in
the 40s, 50s, 60s and 70s, a few economists were
speaking loud and clear against Keynesian
economics.
• They were arguing and building their case against
the whole idea of government fiscal policy (of
adjusting taxes and spending to influence the
economy).
• The leading challengers have been Milton Friedman
and his colleagues who make up the Monetarist
School (or the Chicago school) of economic
thought.

55. • According to Miltion Friedman and his followers, the
government should never take any kind of direct
discretionary action to influence employment or
spending or wages or prices.
• A limit of 4% to 5% on the rate of expansion of the
money supply will take care of the problem of inflation;
automatic price adjustments and the automatic forces
of the market system will take care of unemployment
and depression.
• The government should not do anything to try to make
the economy run better than it runs naturally.
• The monetarists take a long-run view, and assume that
the short-run ups and downs of the economy (inflation,
unemployment, etc.) are just short-run conditions
which the natural market forces will work out in due
time.

56. The Keynesian view of the economy is different
• The Keynesians accept the proposition that the natural
market forces are powerful. But do not believe that
these forces are sufficiently powerful to guarantee
healthy economy.
The Classical position summarized.
• Recessions are temporary because the economy is
self-correcting
• Declining investment will be pushed up again by falling
interest rates
• If consumption falls, it will be raised by falling prices.
• Because recessions are self-correcting, the role of
government is to stand back and do nothing

57. Keynesian Economics and Underdeveloped Countries
• Question that should be raised here is: Do the basic
postulates of Keynesian Economics apply to
underdeveloped countries?
• Keynes in his seminal work “ General Theory” made
some bold assumptions.
• This include the assumption he made with regard to
the attitude of labour, which does not seem
plausible to explain the situation in least developing
countries.
• But the major limitation of the applicability of
Keynesian economics in underdeveloped countries
arise out of its conclusion and policy implications

58. • One policy implication that can be inferred from
“General theory” is the importance of direct
progressive tax on income.
• Keynes argued that such taxation policy is useful as it
reduce saving and increase consumption.
• The rise in total consumption demand will help to
sustain effective demand.
• The question is, is it the need of underdeveloped
countries to increase effective demand through
increased consumption or via increased investment?
• If it is the later, it is saving which should be boosted
not consumption.
• Therefore, adopting progressive taxation may not be
desirable.

59. • The essential task of underdeveloped countries is to
increase saving which is almost in opposite of the task
of Keynesian economics itself was addressed (i.e
increasing aggregate consumption).
• The administrative difficulties involved in the
imposition of such taxes in underdeveloped countries is
also immense.
• Another policy stand in Keynesian economics is building
up of surplus in balance of payment accounts.
• Keynes in General theory advocated the importance of
having positive BOP as it enable the country to invest
abroad.
• But to do the country need to be in a possession of
either the currency of the country where the
investment are to be made or gold or other precious
metals that is acceptable in that country

60. • Underdeveloped countries are, however, in
shortage of such foreign currencies which put the
applicability of Keynesian protectionist prescription
in underdeveloped countries is big question?.
• Keynesian theory of investment multiplier also does
not seem that applicable in economies of
underdeveloped country. This is because of some of
its unrealistic assumption ( such as Automaticity in
supply of goods of various kind).
• In nutshell, most of the policy prescription of
Keynesian economics has little or no relevance to
the situation underdeveloped countries are facing
today. (Read T.N Hajela Pp 608-614)

61. Founder of Macroeconomics
• Keynes is regarded as the pioneer of
macroeconomic theory and policy

62. On the cover of Time,
December 31, 1965, nearly two
decades after his death!