Question

I need ideas on the keynesian model, effects on unemployment, and real GDP.

Answer 1

Solution

The essential element of Keynesian economics is the idea the macroeconomy can be in disequilibrium (recession) for a considerable time. Keynesian economics advocates government intervention to help overcome the lack of aggregate demand to reduce unemployment and increase growth

If saving exceeds investment, we get a recession

Classical theory suggested any fall in investment would lead to lower interest rates; this fall in interest rates would reduce saving, increase investment and cause the economy to return to a new equilibrium of full employment. However, Keynes’ analysis suggests this is unlikely to occur, due to a number of factors, such as a liquidity trap and the general glut of savings

Keynes defended his policy of expansionary fiscal policy and criticised the classical idea of crowding out.

1. Accelerator effect. This stated that investment was highly volatile. If the rate of GDP growth fell, private sector investment fell. However, if government spending increased the growth rate – this would encourage the private sector to also invest. Thus government investment could complement private sector investment – not crowd it out.
2. Multiplier effect. Government spending could have a bigger final impact on real GDP. the Multiplier is likely to be higher in a recession because there are unused resources.
3. Ending the glut. Keynes’ strongest argument is that in a recession, private sector saving rises sharply leading to unused saving. Therefore, the government spending is merely making use of unemployed resources. Bond yields on government borrowing won’t rise because the private sector want to buy government bonds.