The Theory Of Keynesian Economics - 916 Words

Introduction During the Great Depression in the 1930’s â€Å"classical theory had difficulty in explaining why the depression kept getting worse† (Cheung, n.d., para. 1). Many economists have attempted to develop theories that help to explain changing circumstances and why things kept getting worse. John Maynard Keynes, a British economist also known as the founder of macroeconomics, saw this as an opportunity and began to develop alternative ideas. His alternative ideas led to the idea of Keynesian economics. What is Keynesian Economics? Keynesian economics was used to manage the economy for roughly forty years until around 1970. â€Å"The main plank of Keynes’s theory, which has come to bear his name, is the asser-tion that aggregate†¦show more content†¦3). In order for there to be full employment or lower unemployment rates the demand of goods needed to remain constant. In order for demand to increase it had to come from the economy’s output of goods and services. â€Å"An economy’s output of goods and services is the sum of four components: consumption, investment, government purchases, and net exports (the difference between what a country sells to and buys from foreign countries)† (Jahan et al., 2014, para. 4). If savings was more than that of investments, there would be inflation. On the other hand, Keynes stated that if more went into investments than savings there would be a recession in the economy. This would mean that consumers would spend less, causing businesses to invest less in the market. Other well-known economist, such as Adam Smith who felt that government should play no role in the market, Keynes felt that state intervention was the solution to this problem. According to Keynes, state intervention was necessary to â€Å"moderate the booms and busts in e co-nomic activity, otherwise known as the business cycle† (Jahan et al., 2014, para. 4). Keynesian felt that state intervention would promote full employment and price stability and more specifi-cally, â€Å"governments should borrow money and boost demand by pushing the money into the economy. Once the economy recovered, and was expanding again, governments should pay back the loans† (John