Definition
Keynesian Economics is a body of economic thought initiated by British economist and government adviser John Maynard Keynes (1883-1946). It fundamentally maintains that insufficient demand causes unemployment, while excessive demand results in inflation. To manage these economic issues, Keynes advocated for active government intervention through fiscal policies—specifically by adjusting the levels of government expenditure and taxation. In times of economic downturns or depressions, Keynes suggested that increased government spending and an expansionary monetary policy (easy money) could stimulate investment, higher employment, and increased consumer spending.
Examples
- The Great Depression (1930s): During this period, Keynes proposed that the UK government should increase public spending to counteract the depression, resulting in higher employment and economic output.
- 2008 Financial Crisis: Governments worldwide adopted Keynesian approaches involving stimulus packages, tax rebates, and increased expenditure to revive economies hit by recession.
Frequently Asked Questions (FAQs)
Q: What is the main idea behind Keynesian Economics? A: The main idea is that insufficient aggregate demand leads to unemployment and excess demand results in inflation. Hence, government intervention is necessary to manage demand levels through fiscal policies such as government spending and taxation.
Q: How does government spending stimulate the economy? A: Increased government spending injects money into the economy, leading to higher demand for goods and services. This, in turn, can stimulate production, create jobs, and increase consumer spending.
Q: What is “easy money” in the context of Keynesian Economics? A: “Easy money” refers to an expansionary monetary policy where central banks lower interest rates and increase the money supply to boost economic activity.
Q: How can Keynesian Economics prevent inflation? A: By manipulating taxation and government spending, the government can reduce excessive aggregate demand, leading to price stability.
Q: Why is consumer spending important in Keynesian Economics? A: Consumer spending is a primary component of aggregate demand. Increased consumer spending leads to higher production levels and employment, thus driving economic growth.
Related Terms
- Fiscal Policy: Government policies regarding taxation and spending to influence the economy.
- Aggregate Demand: The total demand for goods and services within an economy.
- Inflation: The rate at which the general level of prices for goods and services is rising.
- Unemployment: The situation where individuals who can work and want to work are unable to find employment.
- Multiplier Effect: The concept that an initial amount of spending (usually by the government) leads to increased consumption and hence greater than the initial spending itself.
Online References
- Investopedia: Keynesian Economics Definition
- Wikipedia: Keynesian Economics
- Economic Glossary: Keynesian Economics
Suggested Books for Further Studies
- The General Theory of Employment, Interest, and Money by John Maynard Keynes
- Keynes: The Return of the Master by Robert Skidelsky
- Keynesian Economics: The Search for First Principles by John E. King
- Keynes and Modern Economics by Ryuzo Kuroki
- Keynesian Economics: Fresh Perspectives by Tyler Beck Goodspeed
Fundamentals of Keynesian Economics: Economics Basics Quiz
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