What Was Keynes' Explanation for High Levels of Unemployment in the 1920s

Question

Examlex · Accepted Answer

The Answer is Keynes' explanation for high levels of unemployment in the 1920s and 1930s was based on his theory of aggregate demand. He argued that during times of economic downturn, there is a lack of aggregate demand for goods and services, leading to high levels of unemployment. This was due to a decrease in consumer spending, investment, and government expenditure, which in turn led to a decrease in production and employment.

This explanation challenged neoclassical theory at the time, which emphasized the role of flexible wages and prices in ensuring full employment. Neoclassical economists believed that if wages and prices were allowed to adjust freely, the economy would naturally reach full employment. However, Keynes argued that this was not the case, as wages and prices were not always flexible enough to adjust quickly in response to changes in demand. He also pointed out that during times of economic downturn, businesses may become pessimistic about future demand, leading them to cut back on production and employment regardless of wage levels.

Keynes' explanation for high unemployment challenged the prevailing neoclassical theory by highlighting the importance of aggregate demand in determining employment levels, and by emphasizing the limitations of wage and price flexibility in achieving full employment. This laid the groundwork for his influential work in macroeconomics and the development of Keynesian economics.

What Was Keynes' Explanation for High Levels of Unemployment in the 1920s

Definitions: