Question

One important breakthrough in economic understanding as a result of the work of Keynes was that total private demand may not be sufficient to maintain full employment output. After watching the short film on Keynes and the Great Depression, discuss how this new understanding of the economy contributed to the nations ability to pull itself out of the Great Depression. Can you draw any parallels to the slow down we are currently in after the financial crisis in 2008? -300 words.

Answer 1

The focus upon the Keynesian economic proposal and solutions provided, has helped develop a better understanding of the economy that is contrary to the earlier beliefs. The first important understanding is that it is the demand that creates its supply and efforts should be made to increase the demand. The second understanding is that wages are not flexible, rather sticky in nature. So, unemployment does not respond to the way, that is described by the classical approach that says that wages are flexible. The third understanding is the tendency of people to save more and spend less when there is recession and gloomy outlook of the economy. in the light of it, Keynes proposed strong government action to help economy recover from the recession or great depression. For example, it is the government that will either spend money on different porjects and or reduce taxes. It creates demand in the economy. It will make firms to create supply to cater the demand. Further, new jobs will also be created. As a result, a chain of positive economic activities will take place and economy will come out of the depression.

To make a parallel to the the 2008 financial crisis, the US government allocated more than $787 Billion for spending upon the different sectors. As a result, demand got boosted slowly and progressively to help economy come out of the recession. Here, Federal Reserve also complemented government's action with expansionary monetary policy. It increased the money supply and demand via consumption and investment spending. As a result, economic recovered from recession. It is the practical example of the Keynes economic proposal.