Keynesian Economics Quiz

Keynesian economics is a macroeconomic theory that emphasizes the role of aggregate demand in influencing economic output and inflation. It argues that economic fluctuations can be mitigated by coordinated government and central bank policies, such as fiscal and monetary policy. Keynesian economics developed during and after the Great Depression and was part of the neoclassical synthesis, serving as the standard macroeconomic model from 1945 to 1973. Keynesian economics was later redeveloped as New Keynesian economics and forms the current mainstream macroeconomics. Precursors of Keynesianism included underconsumption theories and the ideas of John Law, Thomas Malthus, and William Trufant Foster. Keynes's early writings included A Tract on Monetary Reform and A Treatise on Money, which attributed unemployment to wage stickiness and treated saving and investment as independent decisions. Keynes argued in The General Theory that the economy cannot maintain itself at full employment and that it is necessary for the government to step in and put purchasing power into the hands of the working population through government spending. The multiplier, which describes the effect of an initial expenditure on aggregate demand and output, was developed by Richard Kahn and was based on the idea that increased trade activity would make for greater trade activity with a cumulative effect. Keynesian economics faced opposition from Winston Churchill and A. C. Pigou, who believed that schemes of capital development were of no use for reducing unemployment.The General Theory of Employment, Interest and Money by John Maynard Keynes

• Keynes wrote The General Theory during the Great Depression when unemployment was high in many countries.
• The book had a significant impact on economic thought, and there has been ongoing debate over its meaning.
• Keynes begins the book with a summary of classical theory, which he encapsulates in his formulation of Say's Law.
• He proposes an alternative based on the relationship between saving and investment, suggesting that unemployment arises when entrepreneurs' incentive to invest fails to keep pace with society's propensity to save.
• The existence of net hoarding is not admitted by Keynes's simplified liquidity preference model.
• Keynes viewed the money supply as one of the main determinants of the state of the real economy.
• He rejects the classical explanation of unemployment based on wage rigidity, but it is unclear what effect the wage rate has on unemployment in his system.
• Keynes suggests that an increase in the money supply leads to a drop in the interest rate and an increase in the amount of investment that can be undertaken profitably, bringing with it an increase in total income.
• Keynes' name is associated with fiscal measures, but they receive only passing reference in the book.
• Keynes' view of saving and investment was his most important departure from the classical outlook.
• The Keynesian cross illustrates how total income is equal to the sum of consumption and investment.
• The liquidity trap is a phenomenon that may impede the effectiveness of monetary policies in reducing unemployment.Keynesian economics is a macroeconomic theory that advocates for government intervention in the economy to promote full employment and stabilize prices. The theory is based on the idea that aggregate demand is the primary driver of economic growth. The IS-LM model is a graphical representation of the Keynesian theory that shows the relationship between interest rates and output. Keynesian policies include active fiscal policy, which consists of increasing government spending or reducing taxes during economic downturns, and monetary policy, which involves reducing interest rates to stimulate investment. Keynes believed that trade imbalances could cause economic instability, and he proposed a global bank that would issue its own currency, the bancor, to regulate international trade and eliminate trade imbalances. Keynes also criticized the theory of comparative advantage, which is the basis of free trade, and advocated for import restrictions and protectionist measures to avoid trade deficits.Keynesian economics dominated economic policy-making in Western countries until the 1970s. It was characterised by using fiscal and monetary policies to manage the economy. Keynesianism is credited with the Golden Age of Capitalism. During this time, Keynesian economics was combined with neoclassical economics to produce the neoclassical synthesis, which gave birth to neo-Keynesian economics. In the 1970s, Keynesian economics began to fall out of favour due to stagflation. Today, there are multiple schools of economic thought that trace their legacy to Keynes, including neo-Keynesian economics, New Keynesian economics, post-Keynesian economics, and the new neoclassical synthesis. Keynesian economics has been associated with liberalism in the US, but this is incorrect. Monetarism, Stockholm School, Marxian economics, public choice, and new classical economics are all other schools of macroeconomic thought.