Conclusions from Keynesian Model - Recession

• A modern industrial economy can get “stuck” in a long recession with very high unemployment. The economy will NOT automatically correct itself.

• Note that this described The Great Depression rather well.

• Conclusion: The economy gets stuck in a high-unemployment recession because firms and households become pessimistic about the future and reduce their spending. Savings replace Consumption, and firms refuse to Invest.

• THE Rx: Government policy to “manage” Aggregate Demand.

• Let’s see how it works……