Question

In a minimum of 150 words explain in your own words what you understand about Keynesian Theory. Make sure you are using your own understanding. Pretend you are explaining this to your Parents after class, and you are very excited about the new information you have acquired

Answer 1

Keynesian is an economic theory that states that the government should increase the demand to boost growth. As per the theory, consumer demand is the primary driving force in an economy.

The Keynesian theory was formulated in the mid-1930s by the British economist John Maynard Keynes in his General Theory Of Employment, Intrest, and Mony and other works.

As per Keynesian, to improve the consumer demand the government has to spend more on infrastructure development, education and removing unemployment. If people are able to get more income they could spend it on the market. The purchasing power of people will increase and eventually the domestic GDP will bloom.

A drawback of Keynesian policy is that overdoing these policies will lead to inflation.

Keynes developed the theory after the Great depression. The theory helped the developed nations during the later part of the Great Depression and World War as a standard economic model.

The three principal tenets in the Keynesian theory of how economy works is:

1. Aggregate demand is influenced by many economic decisions- public and private.
2. Prices, and especially wages, respond slowly to changes in supply and demand.
3. Changes in aggregate demand, whether anticipated or unanticipated have their greatest short-run effect on real output and employment, not on prices.

In the 1970s Keynesian theory was questioned by the rational expectations theorists. They said that taxpayers would anticipate the debt by overspending. They inspired the new Keynesian Theory. They said that the monetary policy is more potent than fiscal policy.