Question

On what theoretical grounds did early Keynesian economists base their belief that monetary policy would be ineffective in curing a depression or serious recession?

Answer 1

Earlier keynesian belived that it was ineffective in influencing for demand.Later many economists have seen that monetary policy plays a role.He also argued for government intervention if the the economy was overheating and experiencing a bad growth.He had argued for the counter cyclical demand management.The justification for government borrowing and higher spending occurs at a certain time of. Recession and creates the evidence for liquidity trap.Keynes contribution was to show interaction between the labour markets and national economy and not treat the labour in isolation.Keynesian economics is based on two main ideas.First aggregate demand is more than aggregate supply to be the primary cause for the short run economic event like a recession.Second wages and price can be a little sticky which will result in economic downturn and led to unemployment.Keynes advocated for increased government spending or the expenditure and lower the taxes to stimulate demand and pull the global economy out of depression.He argues that the solution to recession is expansionary policy such as the tax cut to stimulate consumption or increase the government spending that would rise the aggregate demand.