Given the current state of the economy, what are some of the Keynesian policies that have...

Given the current state of the economy, what are some of the Keynesian policies that have been enacted and explain how they are supposed to help avert a Depression-like downturn.

Expert Solution

Key Keynesian policies enacted and acts as a solution to situation like Depression:

- National Government intervention is needed to stimulate the economy. Keynes, unlike classical economics, does not believe in the natural forces that brings demand equal to supply. He specifically argued that wages are sticky downwards and hence state intervention is required to curb the depression-like situation

- Use of Fiscal and Monetary policy. He primarily focussed on using an expansionary fiscal policy like increasing government expenditure and reduction in taxes to stimulate the economy. This policy, he believed, can be accompanied by subsequent monetary policy

- Wages have to be linked to labor productivity in order to have a simultaneous increase in wages and profits. In this way, rising wages would not act as a burden on the company.

- There will be inflationary or deflationary gaps due to fluctuations in the short run and the economy may obtain an equilibrium which is sub-optimal.

Rahul Sunny answered 2 years ago

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