Question

Discuss John Keynes economic theory and application in our economy (discuss at least 2 historical events when the Keynesian economic was applied) and results (impact on economy/society) of the application. Format: Choose only one: 1. Write 3 pages essay (size 12 New Times Roman, double spaces, 1inch margin) provide at least 3 different resources. Do not use Wikipedia as your resources (articles, book only)

Answer 1

eynesian economics is a theory that says the government should increase demand to boost growth. Keynesians believe consumer demand is the primary driving force in an economy. As a result, the theory supports expansionary fiscal policy. Its main tools are government spending on infrastructure, unemployment benefits, and education. A drawback is that overdoing Keynesian policies increases inflation.

Keynes advocated deficit spending during the contractionary phase of the business cycle. But in recent years, politicians have used it even during the expansionary phase. President Bush's deficit spending in 2006 and 2007 increased the debt. It also helped create a boom that led to the 2007 financial crisis. President Trump is increasing the debt during stable economic growth. That will also lead to a boom-and-bust cycle.

Classical economic theory promotes laissez-faire policy. It says the free market allows the laws of supply and demand to self-regulate the business cycle. It argues that unfettered capitalism will create a productive market on its own. It will enable private entities to own the factors of production. These four factors are entrepreneurship, capital goods, natural resources, and labor. In this theory, business owners use the most efficient practices to maximize profit.

Classical economic theory advocates for a limited government. It should have a balanced budget and incur little debt. Government spending is dangerous because it crowds out private investment. But that only happens when the economy is not in a recession. In that case, government borrowing will compete with corporate bonds. The result is higher interest rates, which make borrowing more expensive. If deficit spending only occurs during a recession, it will not raise interest rates. For that reason, it also won't crowd out private investment.

In the 1970s, rational expectations theorists argued against the Keynesian theory. They said that taxpayers would anticipate the debt caused by deficit spending. Consumers would save today to pay off the future debt. Deficit spending would spur savings, not increase demand or economic growth.

The rational expectations theory inspired the New Keynesians. They said that monetary policy is more potent than fiscal policy. If done right, expansionary monetary policy would negate the need for deficit spending. Central banks don't need politicians’ help to manage the economy. They would merely adjust the money supply.

The two Keynesian assumptions—the importance of aggregate demand in causing recession and the stickiness of wages and prices—can be illustrated using an aggregate demand/aggregate supply, or AD/AS, diagram like the one below. Note that because of the stickiness of wages and prices, the aggregate supply curve is flatter than the supply curves in diagrams A and B above. In fact, if wages and prices were so sticky that they did not fall at all, the aggregate supply curve would be completely flat below potential GDP.

This outcome is an important example of a macroeconomic externality, meaning that what happens at the macro level is different from and inferior to what happens at the micro level. For example, a firm should respond to a decrease in demand for its product by cutting its price to increase sales. But if all firms experience a decrease in demand for their products, sticky prices in the aggregate prevent aggregate demand from rebounding—which would be shown as a movement along the AD curve in response to a lower price level.

The reason for the expenditure multiplier is that one person’s spending becomes another person’s income, which leads to additional spending and additional income, and so forth, so the cumulative impact on GDP is larger than the initial increase in spending. The multiplier is important for understanding the effectiveness of fiscal policy, but it occurs whenever any autonomous increase in spending occurs. Additionally, the multiplier operates in a negative as well as a positive direction.

Thus, when investment spending collapsed during the Great Depression, it caused a much larger decrease in real GDP. The size of the multiplier is critical and was a key element in recent discussions of the effectiveness of the Obama administration’s fiscal stimulus package, officially titled the American Recovery and Reinvestment Act of 2009.

Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression.

Subsequently, Keynesian economics was used to refer to the concept that optimal economic performance could be achieved -– and economic slumps prevented – by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run.