A Study of Keynesian Economics

1073 Words4 Pages
Which fiscal policies might "activist" Keynesian economists recommend to help a depressed economy regain full employment? Explain how they work. Keynes and Keynesian economists propose two large categories of measures to help a depressed economy regain full employment. These are either monetary measures or fiscal measures. Monetary measures rely on the decrease of interest rates and the reasoning behind this approach is as follows. The individual in an economy has two basic option of utilizing his cash: save or consume/invest. If the interest rates are higher, then the individual is more like to save than invest, because his return on investment (namely, on his savings) is bigger than if the interest rates are lower. With this in mind, the individual will spend more, purchase more products and services, invest perhaps in businesses etc. All these actions will induce the economic actors to match the increasing aggregate demand on the market with a higher aggregate supply. Companies and production outlets will have an additional incentive to produce and sell more on the market, since the market is more active in purchasing the products and services that they sell. In turn, in order to reach higher levels of production, the companies and firms need to hire more employees. The unemployment levels will decrease overall in the economy, since this is an aggregate phenomenon. The eventual theoretical conclusion should be that the economy will aim towards full employment, under
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