Consider the following statements regarding the Keynesian Theory of Employment: 1. Keynes supported the classical conclusion of full employment in a capitalist economy. 2. According to Keynes, wage rigidity is the cause of involuntary unemployment. Which of the statements given above is/are correct?

• Keynes rejected the classical conclusion of full employment in a capitalist economy.
• The entire capitalist world now experienced massive unemployment problem. Keynes now forcefully argued that a capitalist economy can never reach full employment.
• According to Keynes, wage rigidity is the cause of involuntary unemployment. This means that a free enterprise capitalist economy always fails to reach full employment because of wage rigidity. He also gave two other reasons—(i) liquidity trap, and (ii) interest inelasticity of investment—for the failure of a capitalist economy to reach the state of full employment.
• Keynesian Employment Theory, however, gives two types of equilibria — full employment equilibrium and underemployment equilibrium.

Note:

• Keynesian Economics is an economic theory of total spending in the economy and its effects on output and inflation. Keynesian Economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression.
• Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of depression.
• Subsequently, Keynesian Economics was used to refer to the concept that optimal economic performance could be achieved—and economic slumps prevented —by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian Economics is considered a "demand-side" theory that focuses on the changes in the economy over the short run.

In brief

• Keynesian Economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions.
• Keynes developed his theories in response to the Great Depression and was highly critical of classical economic arguments that natural economic forces and incentives would be sufficient to help the economy recover.
• Activist fiscal and monetary policy is the primary tools recommended by Keynesian economists to manage the economy and fight unemployment.

Note: The two broadest categories of unemployment are voluntary and involuntary unemployment. When unemployment is voluntary, it means that a person has left his job willingly in search of other employment. When it is involuntary, it means that a person has been fired or laid off and must now look for another job.