Why do Keynesians assume that prices remain the same?

Keynes believed that the level of production and employment depends on the level of total demand. Total demand is the total demand for goods and services of the whole economic system. In microeconomic theory, the automatic adjustment of prices, wages and interest rates will automatically make total demand tend to the level of full employment. Keynes pointed out that the situation of production and employment deteriorated rapidly at that time, and pointed out that no matter how good the theory was, in fact, this automatic adjustment mechanism did not work. The key to the problem is whether there is "insufficient demand". According to the classical economic theory commonly used in the early practice of the General Theory, insufficient demand is only a symptom of recession and economic chaos, not a cause, so it will not appear in the normal market.

Classical economic theory holds that the key to full employment in an economic system is two points: first, the interaction between supply and demand determines the price of goods, and the constant change of prices in turn leads to the balance of supply and demand; Second, the new wealth created by this system may be saved for future consumption or invested in future production, and there is also a supply and demand mechanism that determines this choice. The deposit interest rate follows the same mechanism as the price, that is, it is the price of money.

Even in the worst year of the Great Depression, this theory still interprets economic collapse as the lack of a powerful mechanism to stimulate production. Therefore, the appropriate way is to reduce the labor price to the level of subsistence, leading to a decline in prices, so that purchasing power (employment) will pick up. Money not paid as wages will be converted into investment, perhaps in other industries. Closing factories and firing workers are also necessary measures. Other key policy measures are to balance the national budget, either raising tax rates or cutting fiscal expenditures.

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