A few corrections:
- Use 
key, as outlines by iCodez 
- Put 
import random above your function definition.  Otherwise, a program that uses this will ask where random is. 
- Use 
raw_input("What key would you like to play in") instead of input.  If I type c after the prompt, input will look for a variable named c and print its value.  If that variable doesn't exist, and error is thrown.  raw_input just converts your input to a string. 
- If you're defining 
keyC,keyG, and keyE within the function as constants, then having them as arguments to the function is not necessary (and does nothing). You could have them as optional arguments, or you could leave out the arguments entirely. 
Final Code:
import random
def key(keyC=('em','f','g','am','c'),keyG=('g','c','d','em','am'),keyE=('a','b','e')): 
    #keyC, keyG, keyE as optional arguments
    key = raw_input("What key would you like to play in")
    print "I will display chords in that key"
    if key == 'c':
        return(random.choice(keyC))
    elif key == 'g':
        return(random.choice(keyG))
    elif key == 'e':
        return(random.choice(keyE))
    else:
        return "Pick another key"
Also see this answer.
Edit: As per twasbrillig, this solution assumes Python 2.x and not Python 3.  I use Python 2.7, and it is still commonly seen.