Abstract
Writing against the background of the Great Depression of the 1930s, Keynes was trying to develop a theoretical understanding of why unemployment could be persistent in a capitalist economy. The received theory at that time (which Keynes dubbed as classical but which today is usually termed as neoclassical) attributed this hysteresis in unemployment to the downward rigidity of nominal wages due to “money illusion” on the part of workers. We begin this introductory chapter with a brief overview of the economics of Keynes’ General Theory and discuss various attempts at its formalization and synthesis with the earlier neoclassical economics, embodied in the IS-LM framework. We then introduce the Phillips curve and its incorporation into Keynesian analysis. In the final section, we introduce open economy considerations into the IS-LM framework.
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