What is Keynesian Economics?
Keynesian economics, developed by John Maynard Keynes in the 1930s, argues that aggregate demand drives economic output and employment. It emphasizes government intervention to manage economic cycles, countering classical views that markets self-correct. During downturns, reduced spending leads to unemployment, and Keynes advocated boosting demand to restore equilibrium.
Core Principles of Keynesian Theory
The theory rests on the idea that economies can suffer prolonged slumps due to insufficient demand, not just supply issues. Key components include the multiplier effect, where initial spending increases ripple through the economy, and the role of sticky prices and wages that prevent quick adjustments. It prioritizes short-term stabilization over long-term equilibrium.
Practical Example: The Great Depression Response
During the 1930s Great Depression, U.S. unemployment soared to 25%. Keynesian ideas influenced the New Deal, where government programs like infrastructure projects increased public spending, creating jobs and stimulating demand. This fiscal expansion helped lift the economy out of depression, demonstrating how targeted interventions can accelerate recovery.
Applications and Importance of Fiscal Policy
Fiscal policy in Keynesian economics involves government adjusting spending and taxes to influence demand. In recessions, it calls for deficit spending to boost activity; in booms, tax hikes or cuts in spending to curb inflation. This approach remains vital for modern policymakers, as seen in stimulus packages during the 2008 financial crisis and COVID-19 pandemic, promoting growth and reducing unemployment.