Question

2. Imagine that Canada is in the New Great Depression following the current global pandemic. The unemployment rate is very high, and many people have no source of income. How should the government respond to this downturn according to Keynes theories? Should the Government be concerned with balancing their own budget, why or why not?

3. Explain how cyclical unemployment is related to the theory of insufficiency of effective demand.

4. The theory of diminishing marginal propensity to consume suggests that rich people spend a smaller amount of the income on consumption (demand) than poor people do. Why would this make income inequality even worse for an economy than if this were not true?

Answer 1

answer to ques no 2 : According to keynes theory of employment in the great depression sitution market forces cannot attain equilibrium themselves they need external support for acheiving it. As per the keynes theory effective demand signifies the money spent on consumption and investment;

effective demand = national income = national output

it means effective demand effect national income and national output if its decreasing it leads to unemployment.

the gap between the income and consumption rate should be reduced by incresing the number of investment opportunities.

In short run, aggregate demand price and aggregate supply price they together helps in determining effective demand which further helps in estimating the level of employment in economy at aparticular point of time.

no government should not be concerned with balancing their own budget insignificant to above government should increase the flow of income in an economy so that various investment opportunities will increase which leads to increase effective demand national income and national output.

answer to question no 3: insufficiency of effective demand leads to to decrease consumption expenditure on goods and services and investment which leads to decrease in national income and national output. which further leads to increase in unemployment. since there was need to reduce the gap betweeen consumption and income.

answer to question no 4: marginal propensity to consume refers to the ratio of change in consumption expenditure to change in total income as the rich people spend smaller amount of the income on consumption then poor people do . this make income inequality even worse for an economy because part of the income which is unspent it leads to blockage of income which do not have any circulation the gap between incime and consumption should be lower so that more money can circulate in economy and more investment opportunities will increase that leads to increse in total expenditure and further if effects effective demand , national income and national output.