Question

Please answer the three parts of the question.

32. A. Why, according to Keynes, can a recession be prolonged? Illustrate and discuss

B. Discuss and illustrate the main policy recommendations to get out of a recession according to Keynes

C. Can a reduction in the interest rate get an economy out of recession according to Keynes? Discuss.

Answer 1

A) The economy is in an economic downturn due to a decline in the aggregate need in the country which leads to a boost in joblessness and the decline in earnings levels, based on Keynes. it can be lengthened if there is no boost in the aggregate need which can take place if the government didn't borrow the excess cost savings and buy the jobs in the economy to stabilize and increase the aggregate need.
B) He emphasizes the deficit spending under which the federal government should borrow excess savings which is the result of less usage by the public and lower financial investments and debt payments by the companies. He said lower consumption and lower investments reduce the aggregate demand in the short-term in the economy which leads to the economic downturn. So the onus is with the government to preserve demand by investing higher than its income.
C) The theory behind Keynesian Economics
yes, a decrease in the interest rate gets an economy out of economic downturn according to Keynes.
The classical theory suggested any fall in financial investment would result in lower rates of interest; this fall in interest rates would lower saving, boost financial investment and trigger the economy to go back to a new equilibrium of full employment. Keynes' analysis recommends this is unlikely to occur, due to a number of factors, such as a liquidity trap and the general excess of savings.
Why Keynes felt Recessions might last a long time
- Lower interest rates might not increase usage very much due to the fact that the income impact of lower interest rates indicate individuals have more earnings.
- Liquidity trap. When the rate of interest stop working to boost demand. Rate of interest can't fall below a lower bound rate of no, and a lower rate of interest is ineffective in improving need anyway.
- General Glut. If saving is high and customer spending low, companies will have a lot of unsold products. In this climate, they will cut back on financial investment.
- Animal Spirits If there is an initial fall in investment, entrepreneurs may have unfavorable self-confidence. Their 'animal spirit's' fear recession and lower revenues, so they cut down on investment. Customer confidence might be negatively impacted and they spend less too. Thus Keynes emphasized the value of expectations and confidence.
- Negative Multiplier result. Keynes popularised the concept of a multiplier effect. The concept that a fall in injections into the economy has a knock-on effect and the final impact may be greater than the initial. If a company decreases financial investment, individuals lose their jobs, and this greater joblessness results in reduce costs and affects everybody in the economy.
- The paradox of Thrift. In a recession, individuals take a reasonable method to be risk-averse-- fearing possible recession, they increase cost savings and invest less. When this lower cost is aggregated, it causes lower total need in the economy.