Keynesian Theory During The Great Depression

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Since the establishment of the Keynesian theory during the Great Depression, there was a continuous rivalry between Keynesians and monetarists. The ongoing debate was about which model can most accurately and correctly explain economic instability and which theory provides the best suggestions on how to achieve constant and steady economic growth. There are fundamental differences in these two approaches, for example over the usefulness of government intervention through fiscal policies, monetary aggregates and money market conditions as a policy guide, fixed and flexible exchange rates to name the few. Financial crisis that occurred in 2007-2008, boosted the debate among politicians, economists, scholars over the way the economics policies should be conducted.

To begin with, Keynes came up with a theory that challenged monetarist model, that was widely employed in 1930s, as a reflection of the unprecedented events of the Great Depression. From Keynes’ point of view, it was the failure of the free market theory that led the world into financial crisis. Keynes stressed the fact that non-interventionist policies proposed by monetarist economists were the main cause of the depression. He believed that during the liquidity trap governments’ best response is to stimulate the aggregate demand in the economy to offset lack of confidence among consumers and investors (Field 2011). Fear of future unemployment, uncertainty about the impacts of recession, incentives consumers delay
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