Question

In: Economics

1-) Time period in which Keynesian economics theory was introduced and the situation at the time...

1-) Time period in which Keynesian economics theory was introduced and the situation at the time that inspired the theory inception?

2-) Overview of the Keynesian economic theory.

3-) What are the major publications that propelled the Keynesian economic theory?

Solutions

Expert Solution

1. Keynesian theory started with the publication of the book " Theory of Employment, Interest and Money" in 1939. ?John Maynard Keynes wrote this book as a challenge to classical economics which caused the Great Depression on 1929.

2. JM Keynes was a revolutionary economist who broke all orthodox methods of economic governance. He was the first to propound many concepts- Money illusion for labour, wage-price rigidity, rejection of Say's law (three of his assumptions in Keynes's theory of employment). He also gave the concept of liquidity trap according to which demand for money becomes perfectly elastic when the rate of interest falls below a certain level. He defined interest as the "payment for parting with liquidity".

Perhaps the most important contribution by Keynes was the introduction of precautionary and speculative demand for money. Keynesian economics reagrds money as a medium of exchange as well as a store of value. Another prominant characteristic of Keynesian theory is the concept of effective demand, that is, that point on the demand curve where supply equals demand.

He gave the concepts of Marginal Efficiency of Investment (MEI) which compared to marginal efficiency of capital (MEI) leads to investment decisions.

3. Major Publications:

a. General Theory of Employment, Interest and Money - JM Keynes

b. Principles of Economics- Gregory Mankiw (New Keynesian Economics)


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