Keynesian Theory Presentation

The Keynesian Theory

John Maynard Keynes

Answers

During the years of war Keynes gained a considerable personal fortune from the financial markets. As a bursar of King's College he greatly improved the college's financial position. In 1926 Keynes married Lydia Lopokova, a Russian ballerina.

Upon graduating, he started to work in the India Office, but at the same time Keynes managed to work on a dissertation. This dissertation earned Keynes a fellowship at King's college. Then in 1908, he quit the civil service and returned to Cambridge, which was followed by the outbreak of WWI. Keynes joined the treasury, while in the wake of the Versailles peace treaty he published “The economic Consequences of the peace” Keynes explained the war reparations from a defeated Germany. This book made Keynes world famous.

Keynes' most famous work “The General Theory of Employment, Interest and Money” was published in 1936, which became the benchmark for future economic thought. This work also secured his position as Britain's most influential economist. Then he began working for the treasury again in 1942, which he was made one of the members of the House of the Lords.

During the WWII years Keynes played a decisive role in the negotiations that were to shape, after the war, international economic order. In 1944 he led the British delegation to the Bretton Woods Conference in the United States. At the conference he played a significant part in the planning of the World Bank and the International Monetary Fund.

History of the Theory

• John Maynard Keynes was born on June 5th, 1883 in Cambridge, United Kingdom. He lived until he was 63 and died on April 21, 1946. Growing up in Cambridge his father was an economist and also a philosopher, Keynes mother became the town of Cambridge’s first female mayor. Keynes went to two colleges, Eton and Cambridge University where he excelled through the mathematics course that he was taking.

This theory was developed in the 1930s during the Great Depression, and Keynes really used it as a way to understand the Depression itself.

• The book, “The General Theory of Employment, Interest and Money” by Keynes came out in 1936 and his ideas of using fiscal stimulus to combat recessions was something that helped to combat the Depression, and was a great help in the following 30 years.

“The economic Consequences of the peace”

“The General Theory of Employment, Interest and Money”

1930s

The Great Depression

The financial crisis of 07-09

Spend

The Coordination Argument

Lower wages=lower morale

Customer confusion

Menu Costs

Sticky wages and prices

Aggregate Demand

Aggregate Demand

One’s spending becomes another’s income

Keeping high steady rate of inflation

.The Keynesian Theory states, “Demand creates its own supply,” which by using this law, would help in the Great Depression as a way for there to be more workers to fulfil the demand and get the economy back on track, to end the depression.

Citations

Greenlaw, Steven A., Eric R. Dodge, Cynthia Gamez, Andres Jauregui, Diane Keenan, Dan MacDonald, Amyaz Moledina, Craig Richardson, David Shapiro, and Timothy Taylor. "12: The Keynesian Perspective." Principles of Macroeconomics. N.p.: n.p., n.d. 289-306. Print.

"A Keynes for All Seasons." The Economist. The Economist Newspaper, 26 Nov. 2013. Web. 12 Apr. 2016.

Blinder, Alan S. "Keynesian Economics." : The Concise Encyclopedia of Economics. Iibrary of Economics and Liberty, 2008. Web. 14 Apr. 2016.

"John Maynard Keynes (1883 - 1946)." BBC History. BBC, 22 June 2014. Web. 12 Apr. 2016.

In the 80s and 90s; however, the Keynesian theory wasn’t in much favor, until the financial crisis of 07-09, where the theory would need to be used in order to restore the economy.

“[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.”

Morgan Wright, Madison Kennedy, Sydney Eubank, Jessica Madrid, Stephen Fajardo, and Marcos Garcia

Ad/As to the Keynesian Theory

What is the Keynesian Theory?

The Keynesian model states that price will stay constant, and also the change in aggregate demand determines equilibrium of real GDP.

The Modern Keynesian Model differs from the classical Keynesian model in that supporters of the modern style imply that prices and wages are “sticky” which means they would adjust slower as a result of short-term economic fluctuations.

The importance of sticky wages and prices is because of the assumption of fixed wages and prices, which make the SRAS curve flat below potential GDP. When AD falls the intersection E1 occurs in the flat portion of the SRAS curve where the price level does not change.

The Keynesian Theory in a Recession

• One main reason wages are believed to be sticky is due to the coordination argument. This argument states that in bad economic times, people would only be willing to have their wages lowered if everyone else had the same decrease in wages; but there would be no way to coordinate everyone seeing the same decrease in wages throughout an economy. It is also believed that when wages are lowered, the morale of the workers would go down leading to a lower production rate, which is another reason wages are sticky. In addition to wages, prices are also sticky, this is because frequent changes in prices may make customers angry and confused, and it will also increase menu costs, as they will be constantly updating what the prices are. Due to wages and prices being sticky, inflation is not considered a problem, because as economic times get harder, companies will resort to laying off employees since they cannot change prices.

• The Keynesian Perspective is where prices and wages are not flexible and government involvement is required for growth in the economy. The government is a necessity to keep the economy balanced; more specifically, government spending; whether it is federal, state, or local.The government spends money on important matters such as education, national defense, and transportation. The spending from the government is a necessity for Aggregate Demand, the spending can stimulate Aggregate Demand by either increasing the spending or decreasing it. The government has the power during depressions and recessions to move the Aggregate Demand, this could be by lowering or raising taxes which can affect the consumption and investment spending, shifting the Aggregate Demand.

When dealing with a recession, an expansionary fiscal policy will be ran. This will increase the quantity of money and loans, drive down interest rates, and increase aggregate demand.

If an economy is in recession, with an equilibrium at Er, then the Keynesian response would be to enact a policy to shift aggregate demand to the right from ADr toward ADf.

The Keynesian economic model uses two main tools when dealing with factors such as unemployment, inflation, and recessions: Monetary and Fiscal Policies; however, Keynesian’s rely more heavily on fiscal policies due to its high government intervention.

Another major point in the Keynesian theory is the subject of Aggregate Demand. Keynes believed that AD is more likely to be the cause of an event such as a recession in the short-run, compared to Aggregate Supply. This is because AD is not always automatically at a high enough level to provide industries with a reason to hire workers to reach full employment. As well as AD shifts slowly with the changes in the economy, because of the sticky wages and prices; which do not respond to the increases and decreases in demand.

One key point to the Keynesian Theory is the expenditure multiplier. This states that not only does spending affect the equilibrium level but it is so powerful that it’s changes to the GDP are more than proportional. This is because as one person spends more, that spending become someone else’s income, allowing them to spend more creating a ripple effect.

The Keynesian Theory focuses on the short-run, which is where you see the Keynesian’s greatest effect on real output and employment.

The Keynesian Theory states that prices and wages react slowly to changes in supply and demand. This slow reaction results in periodic shortages and surpluses. One of these surpluses’ can be very evident in labor. Keynesian’s believe that the government could achieve a low level of unemployment if they accepted a high but steady rate of inflation.