Keynesian theory, also known as Keynesian economics, is an economic theory that was developed by British economist John Maynard Keynes during the 1930s. The theory emphasizes the role of government intervention in stabilizing and stimulating the economy during periods of economic downturns, such as recessions or depressions.
One of the main ideas behind Keynesian theory is that the total spending in the economy, also known as aggregate demand, can fall below the level necessary for full employment. This can lead to a situation known as a "liquidity trap," in which interest rates are so low that they no longer stimulate economic activity.
To address this situation, Keynes argued that the government should increase its own spending and/or cut taxes, in order to stimulate demand and create jobs. This would increase aggregate demand and help to restore full employment.
Keynesian theory also emphasizes the importance of monetary policy, or the control of the money supply and interest rates by the central bank. According to this theory, the central bank can help to stabilize the economy by manipulating interest rates and injecting money into the economy through monetary policy.
Overall, Keynesian theory advocates for an active role for government in managing the economy, particularly during times of economic crisis.