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Keynesianism: The Great Depression

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#82 KEYNESIANISM Great Depression of the 1930’s resulted in a drastic economic collapse in most industrialized western countries. This event had greatly affected and changed economic establishments, economic theories and policies. The existing economic classical theories were not able to identify the causes of the drastic change in the economy. With the difficulties felt, John Maynard Keynes, a British economist was able to identify its cause. In his view, he does not believe in the existing idea full employment is through free markets. The free market is achieved when everyone can have a job if they are flexible in their wage demands. His proposed theory, the Keynesian theory, stated that in order for an economy to be in equilibrium …show more content…

The Keynesian theory enumerated three principle tenets in which it would affect aggregate demand thus achieving equilibrium in the economy and these include private and public economic decisions have great impact on aggregate demands, prices respond slowly to changes in supply and demand and lastly alterations in aggregate demand either anticipated or unanticipated have effect on real output and employment …show more content…

Monetary policy is enacted by a central bank that controls money supply that is circulating in the economy. This money supply influences inflation and interest rates that determine consumption level, employment rate and cost of debt. Expansionary monetary policy involves in buying treasury notes and declining interest rates on loans of central banks. These actions help in making the money supply to increase and making interest rates lower. This policy also makes consumption to be more attractive corresponding to savings. Exporters earn from inflation for products they sell is at lower prices. Contractionary is done to stop high inflation rates. Narrowing money supply does not allow business expansions and spending and negatively affects exporters thus reducing aggregate demand. Fiscal policy happens when an alteration takes controls of employment and household income which determines consumer’s spending and investment on different resources. The expansionary fiscal policy is done to respond to employment shocks, over the spending of the government projects on education, infrastructure and benefits to unemployment. Given programs prohibits a negative shift in the aggregate demand for it maintains employment in the government employees and gets people involved with different developments in industries. Continuous or extension in the unemployment benefits

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