Keynesian macroeconomic theory posits that business cycle recessions result from a decline in aggregate demand caused by nominal wage rigidity (stickiness), which prevents immediate price adjustments and leads to involuntary unemployment rather than lower wages. This framework operates within the domain of monetary economics, asserting that short-run output is determined by total expenditure components—consumption, investment, government spending, and net exports—and requiring active fiscal or monetary intervention to stabilize nominal flows when market mechanisms fail due to wage contracts or legal minimums. As a foundational doctrine contrasting with supply-side real business cycle theory, it establishes the mechanism where sticky labor markets decouple wages from demand shocks, necessitating deficit financing via public works to restore employment levels during downturns.
Keynesian macroeconomic theory posits that business cycle recessions result from a decline in aggregate demand caused by nominal wage rigidity (stickiness), which prevents immediate price adjustments…