Illustrate and discuss the simple keynesian model. What are its policy Essay

flesh out and discuss the simple keynesian model. What are its policy implications - Essay Examplent of time, government intervention was the visor needs to stabilize the economy and role of the government gets severely distorted under an open economy. The by-line is a very simple representation of his theory known as the Simple Keynesian Model. For the preceding(prenominal) model we assume that the heart and soul price level is fixed.The central idea of Keynesian model is the return to be at the equilibrium level, it has to be equated with the aggregate demand. If Y stands for total output, that is, the GDP and E equals the aggregate demand, then equilibrium condition requiresThe aggregate demand or the desired expenditures on output is a summation of household consumption or C, desired occupation investment demand or I, and government expenditure or G (government expenditure is nothing but the government spheres demand for goods and services). Incorporating all these comp an ents into the equilibrium condition, the equilibrium condition can be written asNow, national income or Y in general can be decomposed into three parts one part of the national income gets consumed (C), one part gets paid in taxes (T) and the rest is saved (S). So we may writeSo, the equilibrium condition for output in Simple Keynesian Model is desired business investment equal to realized investment. At any disequilibria situation, (Ir I) will either be greater than or less than zero. Ir and I may differ in the following ways.In the above case, (Ir-I) represents the unintended stocktaking accumulation. This is the amount by which the total output level surpasses the aggregate demand and will give in the unsold output that exceeds the level of desired inventory of the firms.In this situation there is an inventory shortfall of (I-Ir) which is again undesired or unintended. Here demand exceeds production and the firms end up change more than planned. Thus inventory falls short o f the desired level. The equilibrium is reached where Ir=I. It