Question

Q1. What are the key features of Keynesian Economic Systems as a distinct macroeconomic transformation from the Classical form of Market Capitalism? Give an example in the context of US economic systems that changed in the 1930s.

Answer 1

Keynesian Economic Systems:

Keynesian economics systems refers to a group of various macroeconomic theories about how in the short run – and especially during recessions – economic output is strongly influenced by aggregate demand (total demand in the economy).

In the Keynesian view, named for British economist John Maynard Keynes, aggregate demand does not necessarily equal the productive capacity of the economy; instead, it is influenced by a host of factors and sometimes behaves erratically, affecting production, employment, and inflation.

Features:

1. The Keynesian economic system explains the importance of government spending:

According to the Keynesian system, an increase in government expenditure reduces the depression by increasing the aggregate demand.

The Classical form of market capitalism theory, on the other hand, explains that any intervention of government in business practices can affect the production of products and services and thus harm the economy.

2. The Keynesian economic system believes in providing short term solution to economic problems whereas the Classical form believes in giving long-term solutions to economic problems.

3. After the Great Depression hit the world in 1929, as per the Keynesian system, the unemployment rate needed to be reduced followed by the inflation rate.

In accordance with Keynesian theory, an increase in employment can reduce the inflation rate.

The classical theory, on the other hand, suggested that inflation is the biggest threat to the economy relative to the unemployment rate.

According to this theory, if the government allows the monopoly of a corporation, then the unemployment from the economy will automatically reduce. This wasn't what occurred, however, and Keynesian theory prevailed, helping lift the United States out of the Great Depression (along with the onset of World War II).

4. Classicists believe that a fluctuation in price level occurs due to change demand of the customers.

Keynesians, on the other hand, believe that fluctuation in price level can be reduced by government intervention.