Question

1. In your own words, define the multiplier effect. Why does this mean a small decrease in consumer spending during a recession could be more harmful? Why does this mean a small increase in government spending could be so beneficial?

2. Define stagflation. Why was Keynesian economics not equipped to address this in the 1970s?

3. Was Keynesian theory useful to combat the 2008 global financial crisis? Why or why not?

4. Overall, do you think Keynesian economics can help create economic stability? What is one major downside to this approach?

Answer 1

1.The multiplier effect is the changes in an economy with the infusion or withdrawal of income.During recession people have less income in hand and tends to save more,so,according to multiplier effect,withdrawal of income or less infusion during recession can create harmful impact.The small increase in government spending means an expansionary policy which will inject income which inturn will led to increase in real GDP.

2.It is a period in an economy where there is an increased in inflation and slow economic growth.It will be followed by high unemployment.keynesian economics believe that the recession or inflation can be control through government intervention but these proof to be wrong.

3.keynesian theory was proof to be useful during 2008 global financial crisis.keynesian theory state that government should turn to fiscal policy i.e. expansionist policy and cutting taxes,these short of practise was adopted during 2008.That is why it can be said that keynesian theory was useful.

4.keynesian economis have helped the economy in many ways ,his "General theory",theory of government intervention in order to prevent depression have a large impact,but in present scenario the economy are quite different from that in past.Now his theory could bring stability in economics.There are many downside of his theory such as, asumption of fiscal policy playing more important role than monetary or fiscal expansionary policy.