Discuss Keynesian economics.

Question

What will be an ideal response?

Answer 1

Answers will vary. U.S. fiscal policy is associated with the economic theories of the British economist John Maynard Keynes (1883-1946). Keynes's theories were the result of his study of the Great Depression of the 1930s.?According to Keynesian economics, the nation cannot automatically recover from a disaster such as the Great Depression-or, for that matter, the Great Recession. In both cases, the shock that initiates the crisis frightens consumers and businesses so much that they, in great numbers, begin to reduce their borrowing and spending.?Unfortunately, if everyone in the economy tries to cut spending at the same time, demand for goods and services drops sharply. That, in turn, reduces the income of everyone selling these goods and services. People become even more reluctant to borrow and spend. The cycle feeds on itself.?The Keynesian solution to this type of impasse is for the government to provide the demand by a huge, if temporary, spending program. The spending must not be paid for through taxes but typically will be financed by borrowing. The government, in other words, begins borrowing when the private sector stops. Some economists believe that just such a spending program broke the back of the Great Depression-that is, the "spending program" known as World War II (1939-1945).