Question

examine the Keynesian model of economics. How does it view the governmental role in managing the economy? How does it address the principles of supply and demand? The labor market? Unemployment?

Answer 1

John Maynard Keynes was a British economist whose work revolved mainly around macroeconomics. Keynes is known as one of the most influential economists of the 20th century. Keynes wrote "The General Theory of Employment, Interest and Money" during the Great Depression of the 1930s. According to classical economic theory, ouput and prices reach a state of equilibrium. But during the depression period it was observed otherwise. Keynes studied this change and suggested government intervention in the form of fiscal policies to control the economic variables. Keynes suggested that during boom periods, government should either increase taxes or cut spending and during economic downturn put deficit spending into effect. Keynes considered deficit spending as an effective tool of fiscal policy.

Keynes advocated that the fall in consumption levels can be corrected by increasing government expenditure to maintain sufficient demand for avoiding high unemployment. Further, Keynes believed that lowering taxes would increase demand (consumption ) and enable the economy to come out of recession.

Keynes advocated that lack of demand for goods resulted in unemployment. When there is less demand, workers sit idle in factories and so the demand for workers shall also be less. Lack of demand leads to unemployment which Keynes believed could be increased by government intervention by way of controlling money supply by either changing interests rates or by buying and selling government securities.

Keynes rejected Say's law that "Supply creates its own demand" and considered aggregate demand as the key driver of an economy. He advocated that aggregate demand influenced employment levels and not wage rates. According to Keynes, when the economy is in recession, low wage rates donot influence employment levels; there is lack of demand for goods and so productivity remains low due to which there is less demand for workers as well.

(Source: Investopedia, BBC, Wikipedia)