Question

About John Maynard Keynes

1.Explain the 4 tenets of the classical position.

2.Consequences of Pease: explain Keynes concerns regarding the Armistice

3.What did Keynes really mean by “in the long run we are all dead>”

4.Explain how the multiplier can achieve full employment

5.What did Keynes have to say about Marx and Marxism

6.Explain Keynes critique of Smith’s invisible hand doctrine

7.What was Keyne position regarding the gold standard?

Answer 1

Classical economists are free market believers and do not approve govt. involvements.

They believe in four main tenets:

(1) Say’s law( It states that supply creates its own demand.) is correct, so that insufficient demand in the economy is unlikely.

(2) Wages, prices, and interest rates are flexible and respond to change in output.

(3) The economy is self-regulating. In the long run, it achieves its potential.

(4) Laissez-faire (Free markets) is the right and sensible economic policy.

2. Keynes wrote a book in 1919. Economic consequences of peace. He thought of more generous terms for Germany. He also believed that putting so many economic sanctions on Germany will lead to rise of extreme elements and may worsen situation. Later on he was proved to be right due to emergence of Hitler and extreme nationalists in Germany.

3.What did Keynes really mean by “in the long run we are all dead>”

Monetarists had a belief that as the economy is self-regulating. In the long run, it achieves its potential. Keynes believed that it does not happen as during inflationary gaps it is possible that wages will go up and also the fact that factor of production prices go up and as producers cannot afford this they reduce aggregate supply i an economy and it achieves its equilibrium. Similarly during recessions factors of production and wages go down and suppliers increase aggregate supply.

Keynes does not agree to this, he believes that during recession, factor prices, especially wages may not comedown. as wages are sticky. There may be minimum wage laws or labors just do not accept less pay and hence, economy will be stuck, unless it is pushed by govt. investments.

This needs to be done in short run as in the long run we are all dead.

4. As explained above in question 3. Govt. investment comes as a multiplier. A $1 put in an economy will keep on multiplying as it will keep on changing hand as people consume more. Hence during recessionary gap, more govt.investments will bring more jobs, more income, more savings and productivity bringing economy back to its potential.