Keynesian

Definition

Keynesian economics is a macroeconomic theory developed by the British economist John Maynard Keynes. It emphasizes the role of government intervention and active fiscal policy in managing the economy and promoting full employment and economic growth.

5 Must Know Facts For Your Next Test

1. Keynesian economics challenges the classical economic view that markets will automatically reach full employment equilibrium.
2. Keynesians believe that aggregate demand is the key driver of economic growth and that government intervention can stabilize the economy.
3. Keynesian policies focus on using fiscal policy, such as changes in government spending and taxation, to influence aggregate demand and achieve full employment.
4. The Keynesian multiplier effect suggests that a small change in autonomous spending can lead to a larger change in total output and income.
5. Keynesian economics gained prominence during the Great Depression when it provided a theoretical basis for government intervention to stimulate the economy.

Review Questions

• Explain how the Keynesian view of aggregate demand differs from the classical perspective.
  • The Keynesian view holds that aggregate demand is the key driver of economic growth and that it may not automatically reach full employment equilibrium. Keynesians believe that government intervention through fiscal policy can be used to influence aggregate demand and stabilize the economy, in contrast to the classical view that markets will naturally self-correct to full employment.
• Describe the role of the Keynesian multiplier effect in the Keynesian framework.
  • The Keynesian multiplier effect suggests that a small change in autonomous spending, such as an increase in government spending, can lead to a larger change in total output and income. This is because the initial increase in spending creates a ripple effect, as the additional income is spent and re-spent throughout the economy, leading to a multiple expansion of economic activity. The size of the multiplier depends on factors like the marginal propensity to consume, making the multiplier effect a key mechanism through which Keynesian policies can have a significant impact on the economy.
• Evaluate the relevance of Keynesian economics in the context of the Phillips Curve and its policy implications.
  • Keynesian economics is closely linked to the Phillips Curve, which describes the inverse relationship between inflation and unemployment. Keynesians believe that policymakers can use this trade-off to actively manage the economy, using fiscal and monetary policies to achieve their desired levels of inflation and unemployment. For example, Keynesian policies may involve increasing government spending to stimulate aggregate demand and reduce unemployment, even if it leads to higher inflation in the short run. This reflects the Keynesian emphasis on achieving full employment, rather than solely focusing on price stability. The policy implications of this approach have been widely debated, particularly in the context of the stagflation experiences of the 1970s, which challenged the simplistic Phillips Curve trade-off.

Related terms

Aggregate Demand:

The total demand for all goods and services in an economy at a given time and price level.

Fiscal Policy:

The use of government spending and taxation to influence the economy.

Multiplier Effect:

The phenomenon where an initial increase in spending leads to a larger increase in total national income.