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By the end of this section, you will be able to:
  • Explain the Keynesian perspective on market forces
  • Analyze the role of government policy in economic management

Ever since the birth of Keynesian economics in the 1930s, controversy has simmered over the extent to which government should play an active role in managing the economy. In the aftermath of the human devastation and misery of the Great Depression, many people—including many economists—became more aware of vulnerabilities within the market-oriented economic system. Some supporters of Keynesian economics advocated a high degree of government planning in all parts of the economy.

However, Keynes himself was careful to separate the issue of aggregate demand from the issue of how well individual markets worked. He argued that individual markets for goods and services were appropriate and useful, but that sometimes that level of aggregate demand was just too low. When 10 million people are willing and able to work, but one million of them are unemployed, he argued, individual markets may be doing a perfectly good job of allocating the efforts of the nine million workers—the problem is that insufficient aggregate demand exists to support jobs for all 10 million. Thus, he believed that, while government should ensure that overall level of aggregate demand is sufficient for an economy to reach full employment, this task did not imply that the government should attempt to set prices and wages throughout the economy, nor to take over and manage large corporations or entire industries directly.

Even if one accepts the Keynesian economic theory, a number of practical questions remain. In the real world, can government economists identify potential GDP accurately? Is a desired increase in aggregate demand better accomplished by a tax cut or by an increase in government spending? Given the inevitable delays and uncertainties as policies are enacted into law, is it reasonable to expect that the government can implement Keynesian economics? Can fixing a recession really be just as simple as pumping up aggregate demand? Government Budgets and Fiscal Policy will probe these issues. The Keynesian approach, with its focus on aggregate demand and sticky prices, has proved useful in understanding how the economy fluctuates in the short run and why recessions and cyclical unemployment occur. In The Neoclassical Perspective , we will consider some of the shortcomings of the Keynesian approach and why it is not especially well-suited for long-run macroeconomic analysis.

The great recession

The lessons learned during the Great Depression of the 1930s and the aggregate expenditure model proposed by John Maynard Keynes gave the modern economists and policymakers of today the tools to effectively navigate the treacherous economy in the latter half of the 2000s. In “How the Great Recession Was Brought to an End,” Alan S. Blinder and Mark Zandi wrote that the actions taken by today’s policymakers stand in sharp contrast to those of the early years of the Great Depression. Today’s economists and policymakers were not content to let the markets recover from recession without taking proactive measures to support consumption and investment. The Federal Reserve actively lowered short-term interest rates and developed innovative ways to pump money into the economy so that credit and investment would not dry up. Both Presidents Bush and Obama and Congress implemented a variety of programs ranging from tax rebates to “Cash for Clunkers” to the Troubled Asset Relief Program to stimulate and stabilize household consumption and encourage investment. Although these policies came under harsh criticism from the public and many politicians, they lessened the impact of the economic downturn and may have saved the country from a second Great Depression.

Key concepts and summary

The Keynesian prescription for stabilizing the economy implies government intervention at the macroeconomic level—increasing aggregate demand when private demand falls and decreasing aggregate demand when private demand rises. This does not imply that the government should be passing laws or regulations that set prices and quantities in microeconomic markets.

References

Blinder, Alan S., and Mark Zandi. “How the Great Recession Was Brought to an End.” Last modified July 27, 2010. http://www.princeton.edu/~blinder/End-of-Great-Recession.pdf.

Questions & Answers

What is Economics and why it is important
Abdul Reply
What is Inflation
Abdul Reply
why price and quantity increase
Otuu Reply
condition under which price and quantity will be increased at the same time
Otuu
factors that hinders mobility of labour
Dennis Reply
what is scarcity
Adams Reply
why are people still unemployed in this economy we live in
Joyce Reply
why are people still unemployed in this economy
Joyce
Because of high technology
Innocent
Due to low government expenditure, the state does not have money to invest in new projects that can result in more job opportunities.
Young
good afternoon all, what are the examples of development projects Pls?
James
I 'm not together with him, when we say government expenditure mean there is recession for her economic country. That why many people still unemployed in this economy we live in, it mainly depend for two phases like Natural hazards and human activities.
Innocent
For the first answer I was responded we are concerns to intensive technology in the whole world it lead to reduce of many workers.
Innocent
wat does the abbreviation ppc mean?
Tumiso
I would like to give you ideas so that you get well how can give answer to this question dears. Attempt to know these words and what these means; Deficit, Surplus and Balanced budget.
Innocent
ppc mean pay -per-click known as search engine marketing
Innocent
i found it ppc means production possibility curve
Tumiso
in economic is that true according to your answer, however about of Marketing is that Pay Per Click.
Innocent
how is inflation, output gap relate to monetary policy
Mary Reply
what are the best strategy when it comes to exporting trade? #Philippines
TuroN Reply
the demand function for 2 commodities A and B in oshiosi are given as follows QA =96-2P-3PB Qã=30-25pA +0.32y where PA and Pa are prices of commodity And B respectively. and Y is cobsumer's money income given PA=N2,PB=N4 and y=1000 compute the price elasticity of demand for commodity A what is the income elasticity of demand for commodity B
divine Reply
what is scarcity
Pekayin Reply
Insufficient to meet the demand
LAEC
inadequate of demand
dawud
meet their demand
DAVID
lack of raw material
jatty
it may be manpower or raw stock for finished goods
jatty
what is the difference between theory and model?
Mabel
decrease in supply of goods
Emmanuel
corner in my heart
Shno
type of inflation
Tei
limited resources unlimited human wants is scarcity
javaria
what is a market structure
Albert Reply
what are the causes of inflation
Samuel Reply
cost push or demand pull inflation
Chuye
ok
Albert
what is the difference between cost push and demand pull
Gifty
the definition for economics here,is it waec standard,please😯😯
Mojekwu Reply
what is inflation
Nsiah Reply
inflation is when much money is chasing few goods
Mojekwu
inflation is when a price of good(s) increase and decriase.
Albert
inflation is the persistent rise in prices if goods
Gifty
what is demand
Nana Reply
demand is the amount of goods consumers are willing and able to but at a particular rate
Gifty

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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