Keynesian Economics Essay

The sequential headlines of chapter nine were “The Determination of Equilibrium Output (Income)” and “The Savings/Investment Approach to Equilibrium.” The equilibrium output equation as listed by Case, Fair, and Oster was that of Y = C + I + G and the “savings/investment approach to equilibrium” was S + T = I + G. The second heading defined S and T as “leakages” and I and G as “injections” (p. 170). Once these two equilibrium approaches were listed on page 170, the government spending multiplier was defined by Case, Fair, and Oster as this: “the ratio of the change in the equilibrium level of output to a change in government spending” (p. 171). This term was also

6. If you have a private-ownership right to something, what does this mean? Does private ownership give you the right to do anything you want with the things that you own? Explain. How does private ownership influence the incentive of individuals to (a) take care of things, (b) conserve resources for the future, and (c) develop and modify things in ways that are beneficial to others? Explain.

Keynesian economics, derived from the ideology of John Maynard Keynes’, was a strategy used during post World War II that would prevent economic decline in the United States by incorporating government spending. Keynesian economics would work by using “...deficit spending to stimulate the economy when in the down cycle and increased taxes to retire the debt during the upswing.”(Lecture A, Week 5). Some government spending programs that reflected the idea of Keynesian economics in America included The Employment

Keynes’ theory suggests that individuals will not necessarily demand what is produced, therefore firms must produce what consumers demand rather than simply expanding production (increasing supply, which previously was assumed to increase aggregate demand). Thus, the level of economic activity, or total output (O) was determined by the total expenditure (E) within an economy. The amount spent by firms, individuals, the government and foreigners is determined by their level of income (Y), which is determined by their level of production (O). Therefore, Keynes proposed that the equilibrium level of income, where there is no tendency to change occurs when:

A form of expansionary policy is fiscal policy, which portrays itself in tax cuts, transfer payments, rebates, and increased government spending. Macroeconomists were more against fiscal policy than monetary expansion. Keynesian economists gave fiscal policy a pivotal role in combating recessions. Monetarists contested saying the fiscal policy would be ineffective if the money supply remained constant, as a result, this view point became rare. Now macroeconomists subscribe to the idea that fiscal policy, and monetary policy can aggregate demand curve. They also concur that government should not try to proportion the budget no matter what state the economy is in. They agree that the budget acts as a balancing option to keep the economy stable.

4.|In the Keynesian-cross model, both the price level and interest rate are held constant. A decrease in government spending reduces output by 1/(1 – MPC) times the change in government spending. In the IS-LM model, the reduction in output caused by the decrease in government spending is partially offset by an increase in investment (crowding in). In the IS-LM model, the decrease in government spending reduces income as in the Keynesian-cross model, but the reduction in income also reduces the demand for money, which in turn reduces the interest rate for a given money supply. The lower interest rate stimulates the off setting investment spending.|

Q1) Which of the following is a correct pair of a resource and its opportunity cost?

Two economic models of thought are classical and Keynesian models. Each model takes a diverse approach to the economic education of financial policy, buyer behavior, and government spending. The classical model, which traces its origins to the 1770s, was the first systematic attempt to explain the determinants of the price level and the national levels of real GDP, employment, consumption, savings, and investments. Classical economist Adam Smith and others assumed that all wages and prices were flexible and that competitive markets existed throughout the economy. Classical economic theory is fixed in the theory of an (no government) unrestrictive economic market. This model especially its focus toward macroeconomics relies on four major assumptions: pure competition exists, wages and prices are flexible, people are motivated by self-interest, and people cannot be fooled by money illusion.

An economical advisor at the time, John Keynes developed a set of ideal concepts that called for a large government role in the economy. John argued that the government could borrow money to spend on things such as public works. With that deficit spending, in return, would decrease the unemployment rate and increase purchasing power. In opposition, Friedrich Hayek believed that less government intervention meant more economic freedom in which the economy would run more logically. Based primarily off a lassies faire policy.

Among Time magazine’s most important people of the century in 1999, John Maynard Keynes (5 June 1883 - 21 April 1946), was widely considered to be one of the most influential economists of the 20th century and the founder of modern macroeconomics. The magazine stated “his radical idea that governments should spend money they don’t have may have saved capitalism.” In addition to being an economist, Keynes also served the British Civil Service, directed the Bank of England, and was part of the Bloomsbury Group of intellectuals. Fundamentally, his ideas changed the practice and theory of macroeconomics and the economic policies of governments. Many of his ideas are revolutionary, known as Keynesian economics, that can define virtually all economists who came after him.

For an economy to grow, succeed and become stable there has to be an involvement of the government. Keynes's theory shows how the total spending in the economy affects output (production) and inflation (Increase in prices).

John Maynard Keynes was questioning the theories of the original economists and trying to understand why the Great Depression occurred; he proposed that there needs to be money spent in order to make our economy stay strong, as opposed to the “classical theory” which stated that proper wages are what makes the economy strong. His theory was that when a depression occurs, if consumers spent money, instead of saving it, the economy would be stimulated and drag itself out of the depression.

As mentioned, Keynes believed aggregate demand was an integral driver within any economy. An increase in consumer spending also increases aggregate demand. Keynes understood that consumer’s confidence within and expectations about the economy will drive an individual's decision to spend or to save. David Dequech argues that Keynes’ theory concerning uncertainty and expectations is one of the most significant contributions to the discipline of macroeconomics. In his article, “Confidence and Action,” Dequech explains certain aspects of Keynes’ theory of confidence, uncertainty and expectations. Dequech argues that Keynes believed expectations are the prediction people make about the coming future. Confidence, on the other hand, is the probability one weighs out that an event will turn out different than they imagined (Dequech 505). Therefore, when economies experience periods of depression, consumer confidence tends to decline, and their uncertainty causes individuals to save rather than spend. When consumers tend to save, rather than spend, businesses also have to reduce expenditures (Sarwat 53). This theory is confirmed by the basic laws of supply and demand, that when demand is lower for products from a certain business, the business responds by decreasing investment spending. This phenomenon prevents the market from benefiting from the resources necessary

Keynesian economists believe that growth-oriented, or expansionary, fiscal policy is necessary in a recession because private sector investing and consumption drops. Expansionary fiscal policy can directly create jobs and economic activity by injecting money into the economy through either government spending or a reduction in taxes. To do this, the government must often spend more that current revenues from taxes. In this case, government deficit spending is necessary to maintain a reasonable level of economic activity. This is where monetary policy comes in. Monetary policy attempts to create the money needed by the federal government without increasing inflation as a result of increasing the money supply through securities sales.

You may have already studied microeconomics, which looks at supply, demand and prices for individual goods. Macroeconomics looks at the bigger picture and involves the study of the economy as a whole. National income Let us start by looking at a simple example - a 'two sector' economy made up of households (consumers) and firms (producers) -and use this to develop the idea of national income. To start with we will ignore the impact of government policy and overseas sectors. Households ultimately own the factors of production, e.g., labour, materials and capital, and supply these factors to firms who use them to produce goods and services.