Question

How did Maynard Keynes propose to address the Great Depression? Did it differ from the Classical views? How does it compare to Monetarism?

Answer 1

Maynard Keynes proposed to manage the Great Depression through a mixed approach and a combination of both fiscal and monetary policies. He suggested more government involvement through managing both the economic policies. Initially the interest rates should be reduced and investment in infrastructure should be increased by the government. This will give rise to more income in the economy, which in turn will give the consumers more money to spend thereby increasing the consumption expenditure. This increases the aggregate demand in the economy and the output increases to meet the increase in demand. For increasing the output, the business investment spending also increases and this cascade starts an overall increase in the GDP of an economy and situations like the Great Depression can be tackled.

The Classical and Monetarist views were contrary to the Keynesian theory claiming that the monetary policy is always ineffective and too much government intervention is not good.