At the beginning of a recession in 2018, unemployment begins rising. Unemployment increases from 4.6% to 7.9% in 4 months. What would a Keynesian economist specifically recommend doing?

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Business

Emma Roberts

24 November, 00:41

At the beginning of a recession in 2018, unemployment begins rising. Unemployment increases from 4.6% to 7.9% in 4 months. What would a Keynesian economist specifically recommend doing?

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Answers (1)

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Donovan Sanders · Answer 1

Should be done: a counter cyclical or a growth-oriented fiscal policy, deficit spending and stabilize the aggregate demand.

Explanation:

Keynesian economy is a macroeconomic theory based on the views of the 20th century British economist John Maynard Keynes. Keynes' economy advocates a mixed economy where the private sector is predominant but the state and the public sector play a major role. According to the Keynesian theory, the sum of all the micro-economic behaviors shown by all individuals and businesses results in inefficiency and the economy operates at a level below its potential output and growth. When total demand for products is insufficient, the economy enters a crisis and unnecessary unemployment arises due to defensive behavior of the producers. In such cases, the government may pursue policies to increase aggregate demand, and as a result may accelerate economic activities and reduce unemployment. Most Keynesian propose policies to stabilize the business cycle. For example, if the unemployment level is too high, the state can pursue a growth-oriented monetary policy.

Keynes was thinking of reviving the economy with low interest and state investments as a solution to the Great Depression. The government increases investment income and consequently consumption, resulting in more production and investment, resulting in increased consumption again. The first economic stimulus investment triggers a series of events and the subsequent investment provides a much tougher economic efficiency. According to Keynes, money supply is provided by monetary authority (eg central bank) and monetary policy affects prices. When interest rates fall below this normal rate, investors avoid buying bonds and prefer to hold cash in anticipation of higher rates. When interest rates are above this normal rate, they tend to buy bonds with the expectation that they will fall. Therefore, it can be said that there is a negative relationship between money demand and interest rate.