The Keynesian Theory Approach

This policy is results in faster results to speed up the economy for the short term. Fiscal Policy is later used to develop a plan of yearly actions and is a long term way to stabilize the economy. The next idea to stabilize the economy is a theory called monetarism which is the belief that if government did not interfere with the market economy that employment would be high and inflation low. Followers believe the government is the reason of downturns such as the recent recession.

Keynesian economics says, “A depressed economy is the result of inadequate spending. Keynesian argued that government intervention can help a depressed economy through monetary policy and fiscal policy. The idea established by Keynes was that managing the economy is a government responsibility.

The economic meaning of a recession is that the gross Domestic Product (GDP) has declined for two or more consecutive quarters. Unemployment rises, housing falls, stocks fall and the economy is in trouble. Whenever the government sees that the economy is entering a recession it is important for it to act. The U.S acted in two ways during the Great recession of 2008 through fiscal and monetary policies. Renaud Fillieule identifies that “ Monetary and credit expansions have been the main tools used by the U.S. government and central bank to try and recover economically from the Great Recession of 2008” (Fillieule r, Pg. 99 2016). These Keynesian policies are debatable among economist, none the less they were implemented and put the U.S on the road to recovery.

One of the hardest and most difficult economic recessions in history was accomplished using Keynesian economics by John Fredrick Kennedy. “Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. Although the term has been used (and abused) to describe many things over the years” there is six principal systems or beliefs that are what a Keynesian believes. (20) A Keynesian believes that total demand is inclined by a swarm of financial decisions public and private. The public decisions include, financial and economic policies. Nearly all Keynesians and monetarists believe that both financial and economic policies affect total demand. Secondly changes in total demand have their affect on output and on employment not on prices. Keynesians believe that it must get worse for it to get better. Also they believe that we live in the short run of things not in the long run. Keynes’s famous statement, “In the long run, we are all dead.” Thirdly Keynesians believe that prices, and more

Keynes believes that the government has a positive effect on the economic growth and the quality of services. In recessions, businesses and people tend to spend less money. He was against this idea and suggested that “it’s spending that matters” because lower spending results in demand falling and job losses. Keynes's solution to the problem was for the government to play an active role in the economy. If the government plays an active role in the economy, the economy will bloom and progres to its full potential. He believes that the government should stimulate economic growth by increasing demand through increased credit and public spending. Keynes is embracing liberal views such as economic freedom for the people to an extent in which it boosts the economy as he believes it’s the key factor that allows the economy to reach its full potential with government intervention. Keynes disagreed and strongly opposed Milton Friedman’s ideas. Friedman suggested the monetary policy, controlling the money supply, can help out the economy throughout recession. On the other side, Keynes suggested that monetary policies play a very little role in stimulating the economy and aggregate demand. He disagreed with Milton Friedman’s ideas as he believed the government should encourage spending and discourage

Keynes believed that it was a waste to save money, it only lead to destruction and prevent economic growth. He didn’t agree with private investment. He felt by keeping money in your pocket is senseless because soon we will all be dead. You can’t take the money with you. He also felt that the government should increase spending during times of recessions.

Keynesian economic theory arose first in opposition to classical economic theory during the 1930s. Keynes developed his philosophy as a way of remedying the aftereffects of the Great Crash, which had spiraled into a great, world-wide depression. According to classical economic theory, the ups and downs of the business cycle are to be expected. Eventually, prices become so low that people start buying goods and services again. Businesses begin hiring again and the price of labor becomes so cheap businesses are willing to give employment to formerly unemployed workers. However, classical economic theory does not take into consideration that during very severe downturns people begin 'hoarding money in their mattresses' they refuse to spend money no matter how low prices drop, because they have a legitimate fear of loosing their jobs. Keynes "concluded that classical economics rested on a fundamental error. It assumed, mistakenly, that the balance between supply and demand would ensure full employment. On the contrary, in Keynes's view, the economy was chronically unstable and subject to fluctuations, and supply and demand could well balance out at an equilibrium that did not deliver full employment. The reasons were inadequate investment and over-saving, both rooted in the psychology of uncertain" (Yergin & Stainslaw 1998).

John Maynard Keynes (1883-1946) is a British economist who is the founder of Keynesian economics and the father of modern macroeconomics. He published his foundational book: “The General Theory of Employment, Interest and Money,” in 1936 less than a decade after the great depression of 1929. His theories were largely in contrast with classical economics. Between the 1970s and the 1990s, more economists reviewed the Keynesian economics and proposed some changes, they are known as the New Keynesian economics or Neo-Keynesian. James Tobin, Gregory Mankiw, and David Romer developed the foundations of Neo-Keynesian (Greenlaw, n.d). In the following essay I shed the light on the basic principles of the New Keynesian economics and how it deals with

a. The primary concept of the Keynesian School of economic thought revolved around the management of aggregate demand. The author of this idea, John Maynard Keynes, believed the economy was fundamentally unable to sustain itself at full employment. One of his proposed solutions to this was for the government to intervene to increase aggregate demand. He argued that by investing government funds, the amplitude of the business cycle could be reduced and would stabilize continued economic growth. Another method of managing aggregate demand involved taxation. By lowering the taxes on certain goods and raising others, the government could influence public demand for certain products to fluctuate based on its benefit to the economy as a whole.

Keynesian economic was developed by British economist John Maynard Keynes during the 1930s as a way of understanding why the great depression happened. Keynes felt that if government expenditures increased and taxes were lowered, then the global economy could be pulled out of the depression. Macroeconomics is the study of national and regional economies. It examines economic factors like unemployment, gross national product, consumption, Inflation rates, Business cycle fluctuations and foreign trade. Keynes point of view about the Macro Economy was that the government must step in to correct the instability of the economy. If the economy faces a recession, government must increase demand by spending more; lowering taxes; lowering interest rates and increasing welfare. If the economy faces a time of inflation, the government must reduce demand by spending less; raise taxes; increase interest rates and reducing welfare.

In circumstances; such as war, Keynesians economic policy provides a near perfect solution for boosting an economy. However, without a war to force an increase in demand, an increase in government spending would snowball into a business cycle of aggregate demand problems.

Macroeconomics has become an overriding thing. The need to promote a healthy economy has been a critical goal for most governments and economists. However this has not been tenable in most cases. The economy can fluctuate but should not go out of control. This means that it has to stay within the expected realms of growth path so that it is capable of avoiding long-drawn recessions. This can occur based on internal mechanism or through help from policy that provide protection from inflation and recession. The economy should be able to respond to such polices without any major structural constraints. In this case, macroeconomics helps in understanding the underlying issues that can help in the realization of such economies. A healthy economy has to be steady and stable over the long-term. Based on this information, this paper explores the underlying issues in macroeconomics, especially with regard to components.

As interesting as the subject of economics is, it’s a subject that isn’t easily understood. In order to grasp the subject you have to really understand the concepts. And it’s not like riding a bike, once you know how to do it you will always have it engraved in your head. I will attempt to highlight the key factors of the two theories of economics: classical economics and Keynesian economics.

Keynesian theory is a concept developed by John Maynard Keynes, in which it is believed that governments should intervene with the economy and how it is dealt. Keynesian economists believe that saving beyond planned investments is a very serious problem that encourages recession. If saving goes beyond investments, there will not be enough demand to purchase the goods and services that the economy is producing. Therefore, leading into a recession, or worse – a depression. Keynesian economists believe that a government stimulus is more effective at boosting aggregate demand than a tax cut because they believe that government intervention is a way to stabilize an economy.

Our economy has evolved from centuries ago to what it is today from the start of supply and demand and learning how to make trades. The foundations of this learning process has also came from theories on how to manage and control the economy. This has been built from several thinkers and theorist implanting their ideas into action and having results in the prosperity or failure of an economy. As these theories have evolved as well and some with great prosperity they have been recognized and titled as the Keynesian School of Economic Thought as this is a theory believing aggregate demand is influenced by public and private economic decisions. There is also the Monetarism School of Economic Thought which focuses on how the money supply has