Keynesian Economics

Examples of Keynesian Economics in the following topics:

• Keynesian Theory

  • Keynesian economics states that in the short-run, economic output is substantially influenced by aggregate demand.
  • Keynesian economics states that in the short-run, especially during recessions, economic output is substantially influenced by aggregate demand (the total spending in the economy).
  • At the time that Keynesian theory was developed, mainstream economic thought believed that the economy existed in a state of general equilibrium.
  • Keynesian economists believed that aggregate demand for goods and services not meeting the supply was one of the most serious economic problems.
  • The Keynesian School of economic thought emphasized the need for government intervention in order to stabilize and stimulate the economy during a recession or depression.

• Alternative Views

  • Neoclassical and neo-Keynesian ideas can be coupled and referred to as the neoclassical synthesis, combining alternative views in economics.
  • The two most well-known schools, classical economics and Keynesian economics, have been adapting to incorporate new information and ideas from one another as well as lesser known schools of economics (Chicago, Austrian, etc.).
  • The neoclassical perspective, in conjunction with Keynesian ideas, is referred to as the neoclassical synthesis, which is largely considered the 'mainstream' economic perspective.
  • Neo-Keynesian economics is often confused with 'New Keynesian' economics (which attempts to provide microeconomic foundation to Keynesian views, particularly in light of stagflation in the 1970s).
  • Stagflation (economic stagnation and inflation simultaneously) created issues with this however, necessitating New Keynesian ideas (as discussed briefly above).

• Fours Schools of Economic Thought: Classical, Marxian, Keynesian, and the Chicago School.

  • Mainstream modern economics can be broken down into four schools of economic thought: classical, Marxian, Keynesian, and the Chicago School.
  • Mainstream modern economics can be broken down into four schools of economic thought:
  • Classical economics, also called classical political economy, was the original form of mainstream economics in the 18th and 19th centuries.
  • Keynesian economics derives from John Maynard Keynes, and in particular his book, The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field.
  • A final school of economic thought, the Chicago School of economics, is best known for its free market advocacy and monetarist ideas.

• Defining Fiscal Policy

  • Governments use fiscal policy to influence the level of aggregate demand in the economy in an effort to achieve the economic objectives of price stability, full employment, and economic growth.
  • Expansionary: This type of policy is usually undertaken during recessions to increase the level of economic activity.
  • In times of recession, Keynesian economics suggests that increasing government spending and decreasing tax rates is the best way to stimulate aggregate demand.
  • Keynesians argue that this approach should be used in times of recession or low economic activity as an essential tool for building the foundation for strong economic growth and working towards full employment .
  • In times of economic boom, Keynesian theory posits that removing spending from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices when inflation is too high.

• Keynesian Theory

  • Keynesian theory posits that aggregate demand will not always meet the supply produced.
  • John Maynard Keynes published a book in 1936 called The General Theory of Employment, Interest, and Money, laying the groundwork for his legacy of the Keynesian Theory of Economics.
  • With this overview in mind, Keynesian Theory generally observes the following concepts:
  • The other side of that coin is that positive economic situations can spiral upwards.
  • IS-LM : While the IS-LM Model is a complicated byproduct of Keynesian economics, it can be summarized as the relationship between interest rates (y-axis) and the real economic output (x-axis).

• Stability Through Fiscal Policy

  • Governments can use fiscal policy as a means of influencing economic variables in pursuit of policy objectives.
  • Keynesian economics suggests that increasing government spending and decreasing tax rates are the best ways to stimulate aggregate demand, and decreasing spending and increasing taxes after the economic boom begins.
  • Keynesians argue that this method may be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working towards full employment.
  • Keynesian theory posits that removing spending from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices.
  • Some classical and neoclassical economists argue that crowding out completely negates any fiscal stimulus; this is known as the Treasury View, which Keynesian economics rejects.

• Fiscal Policy

  • Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
  • Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth.
  • Keynesian Economics argues this method be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working towards full employment.
  • Keynesian theory posits that removing spending from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices.
  • Neoclassical economists generally emphasize crowding out while Keynesians argue that fiscal policy can still be effective especially in a liquidity trap where, they argue, crowding out is minimal.

• Expansionary Versus Contractionary Fiscal Policy

  • Keynesian economists argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector in order stabilize output over the business cycle.
  • According to Keynesian economics, if the economy is producing less than potential output, government spending can be used to employ idle resources and boost output.
  • Conversely, in times of economic expansion, the government can adopt a contractionary policy, decreasing spending, which decreases aggregate demand and the real GDP, resulting in a decrease in prices.
  • Keynesian economists advocate counter-cyclical fiscal policies.
  • This means increased spending and lower taxes during recessions and lower spending and higher taxes during economic boom times.

• Recovery

  • The objective of economic recovery when in crisis is to stabilize the economy and recapture the value lost using economic stimulus strategies.
  • The objective of economic recovery when in crisis is to stabilize the economy, and from there recapture the value lost through economic stimulus strategies while addressing the factors which contributed to the collapse in the first place.
  • Understanding the inputs, and expected outcomes, is critical to understanding the economics behind reacting to economic crises (particularly from a Keynesian perspective).
  • This is largely based on the Keynesian concept of driving spending through enabling spending, in turn driving up demand, creating jobs, and driving spending up further.
  • President Obama's administration was criticized by classical economists for employing this as well as Keynesian economists (such as Paul Krugman) for not employing it enough.

• Arguments for and Against Balancing the Budget

  • Balanced budgets, and the associated topic of budget deficits, are a contentious point within both academic economics and politics.
  • Balanced budgets, and the associated topic of budget deficits, are a contentious point within academic economics and within politics.
  • The mainstream economic view is that having a balanced budget in every year is not desirable.
  • Keynesian economists argue that government budgets should be balanced over the business cycles.
  • Keynesians argue that increasing government spending and decreasing taxes can minimize the painful effects of a recession.