Keynesian Economics Essay - 663 Words

The U.S. never fully recovered from the Great Depression until the government employed the use of Keynes Economics. John Maynard Keynes was a British economist whose ideas and theories have greatly influenced the practice of modern economics as well as the economic policies of governments worldwide. He believed that in times when the economy slowed down or encountered declines, people would not spend as much money and therefore the economy would steadily decline until a depression occurred. He proposed that if the government injected money into the economy, it would help stimulate consumers to purchase more and firms would produce more as a result, in a continuous cycle. This cycle is called the multiplier effect. Keynes ideas have†¦show more content†¦Ã¢â‚¬Å"The aggregate expenditures line is the summation of consumption expenditures, investment expenditures, government purchases, and net exports. The 45-degree line represents all combinations in which aggregate expenditure s equal aggregate output. Keynesian equilibrium is also represented by the saving investment, or injection-leakage, model as the intersection between the injection line (investment expenditures, government purchases, and exports) and the leakage line (saving, taxes, and imports).†(2) Keynes established the theory of the multiplier effect. Keynesians believe that, because prices are somewhat predictable, variations in spending, such as consumption, investment, or government expenditures, cause output to fluctuate. For example, if government spending increases and all other components remain constant, then output will increase. The multiplier effect is defined as â€Å"output increases by a multiple of the original change in spending that caused it.†(3) This means, that if the government were to increase their spending by ten billion dollars, it could cause the total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Thus the money that gets injected into the economy creates a multiplier effect and promotes more circulation of money by creatingShow MoreRelatedKeynesian Economics1016 Words   |  5 PagesJohn Maynard Keynes’ influence and ideology Even today John M. Keynes’ ideas remain crucial to the most important debate of our time: how can we escape from the economic crisis? Should governments borrow and spend their way out of trouble or slash spending and reduce the national debt? 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