Keynesian Theory of business cycles emphasizes demand fluctuations and their amplification through multiplier effects. Basic mechanism: Autonomous demand changes (investment, consumption shifts, exports) multiply through economy via spending rounds. Multiplier principle: Initial spending increase generates income for recipients → they spend portion (MPC) → further income generated → spending continues, amplifying effect. Investment volatility: Investment highly responsive to profit expectations and interest rates; expectations volatile; small change causes large multiplier effect. Consumption stability: Relatively stable based on current income (consumption function); less volatile than investment. Aggregate demand: Sum of C + I + G + (X-M); fluctuations come primarily from volatile investment. Keynes' insight: Economies don't self-correct quickly; involuntary unemployment persists as wages sticky downward. Animal spirits: Psychological confidence affects investment; changes in confidence amplify cycles. Policy implications: Government can smooth cycles through fiscal policy; during downturns, stimulus increases demand; automatic stabilizers help. Critique: Assumes wages/prices sticky; in long run, flexible prices adjust; also ignores expectations adaptation. Modern updates: Incorporates expectations (rational expectations, adaptive expectations); acknowledges policy lag effects. Multiplier size debate: Fiscal multiplier estimates range 0.5-2 depending on assumptions (Ricardian equivalence, liquidity constraints). ICAI focus: Multiplier mechanism, investment volatility role, policy responses. Exam tip: Keynesian emphasis on demand; remember multiplier = 1/(1-MPC); investment volatility is key cycle driver.