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Keynesian Economics

Keynesian economics emphasizes the importance of government intervention in stabilizing the economy during periods of recession and depression, as free markets can be volatile and not self-correcting. The concept of 'animal spirits' highlights the role of confidence and expectations in driving economic activity, where low confidence can lead to reduced demand and investment. Keynesians advocate for active fiscal policies, such as tax cuts and government spending on infrastructure, to stimulate demand and promote economic recovery.

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49 views5 pages

Keynesian Economics

Keynesian economics emphasizes the importance of government intervention in stabilizing the economy during periods of recession and depression, as free markets can be volatile and not self-correcting. The concept of 'animal spirits' highlights the role of confidence and expectations in driving economic activity, where low confidence can lead to reduced demand and investment. Keynesians advocate for active fiscal policies, such as tax cuts and government spending on infrastructure, to stimulate demand and promote economic recovery.

Uploaded by

hamna.sadiq
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Keynesian Economics

AQA Economics
Keynesian Ideas
An understanding of Keynesian ideas can be helpful in evaluating
macroeconomic stability in terms of prices, jobs and incomes

• Keynesians believe that free markets are


volatile and not always self-correcting in
the event of an economic shock
• The free-market system is prone to
lengthy periods of recession & depression
• The volatility of aggregate demand (AD =
C+I+G+X-M) can be explained in part by
changes in consumer and business John Maynard Keynes
was born in 1883.
sentiment – known as animal spirits
Educated at Eton College
• In a world of stagnation or depression, and Cambridge University
direct state intervention may be essential - where he later taught.
He died aged 63 in 1946
to restore confidence and lift demand.
The Importance of Animal Spirits
John Maynard Keynes coined the notion of animal spirits which
refers to the driving force that gets people going in the economy

• Animal spirits refers to a mix of confidence, trust, mood and


expectations
• Animal spirits can fluctuate quickly as populations of people and
the business community change their thinking
• When confidence is low, individuals save more, businesses save
more too and, because demand and profits are lower than
expected, they cut back on production and perhaps postpone or
cancel capital investment projects. Economic activity suffers.
• Higher saving and reduced investment both have the effect of
reducing demand and incomes in the circular flow causing an
economic contraction – this is called the “paradox of thrift”
Keynesian Approaches to Managing Demand
Keynesian economists tend to favour the active use of fiscal policy
as the may way of managing demand and economic activity

Active measures Tax cuts for lower


to inject extra Counter income groups
Targeted tax
demand can drag cyclical with higher
changes
an economy out policies propensity to
of a recession spend boosts AD

Keynesians favour Depending on the


labour-intensive Government size of the fiscal
Government
projects such as borrowing multiplier –
capital borrowing will
new transport can pay for
infrastructure spending create more tax
projects and
itself revenues
house-building
Keynesian Economics

AQA Economics

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