The Keynesian Economic Depression Model

The Keynesian Economic downturn Model Essay Sample

There are usually different causes and approaches for explaining economic downturns which were proposed by various experts and theorists. On the other hand, the successful recovery from the 1930s of typically the 1930s and the economical hegemony that the Usa States enjoyed eventually have contributed to the popularity and significance of the Keynesian theory of depression that will adhered to a purely economic framework.

Named after the dad of modern economics, John Maynard Keynes, the Keynesian theory focused on the particular interdependence of consumers in addition to critical role of customer spending in stimulating and maintaining economic productivity. Beneath this theory, a reduction in aggregate consumer need and expenditures throughout the economy will certainly cause a substantial deterioration in income and work. Consequently, economic depressions occur because people store or set their money even if funds supply is expanded. The particular weakening of consumer spending on the other palm may be attributed for different reasons such since perceived pessimism on economical activity similar to typically the currency markets crash that happened through the Great Depression associated with the 1930’s; destruction plus despair cause by natural calamities as well the particular Marxist socio-political perception from the widening disparity between the particular capitalists and the employees in which the latter (poor) is incapable to pay for or buy what the particular former (capitalists) produces inside surplus.

Typically the Keynesian theory further suggests that when the economy is usually experiencing a downturn, government authorities should step in to tackle the shortfall in demand by initiating spending or simply by slashing taxes. (Knoop, 2005, pp50-51) The former is meant to create sufficient aggregate demand that can in turn initiate greater financial productivity while the second option will provide greater acquiring power for consumers to be able to start spending. In comparison, government’s misguided policies in order to curtail spending worsen the particular depression. For instance, President Hoover’s attempt to promote American products by increasing US import duties (Smoot-Hawley Tariff) retaliated as additional nations also raised taxes on American exports thus using international trade of which exacerbated the depression. (Taylor, 1998, p493) Following this specific Keynesian principle, the ALL OF US involvement in the Second World War that initiated government shelling out produced the adequate aggregate expenditure that help enhance US economy towards its recovery. (Thomas, 1981, p91)

In today’s global financial crises however, the relevance and ideas regarding economic downturns of one more great economist was elevated. Irvin Fisher suggested that over-indebtedness and deflation, which often tend to reproduce plus reinforce each other, are the principal causes of economic depression. (Mullineux, 1990, p69) Over-indebtedness refers to debts which usually have become too cumbersome for the borrowers similar to the sub prime mortgage turmoil in the US that led to rampant mortgage loan payment failures and foreclosures that is believed to have triggered the existing global financial crisis. (Kuttner, 2008, pp180-190) The problem of debt increases because the underlying security worth decreases and incomes fall. Bad debts destabilize banks compelling asset sales in addition to resulting to deflation or perhaps a decline in price level of good plus services. The outcome associated with which is the reduction inside economic productivity, along with trade activities and rising joblessness, which we all right now know too well.

At the instant, the US government’s “stimulus package” is based about the Keynesian paradigm associated with energizing the economy by means of government’s interjections of money especially to collapsing sectors (auto industry) to aid incite spending. Whether the technique works or is condemned to failure remains a debatable issue and is usually yet to be observed.


Knoop, T. A. (2004). Recessions and depressions: understanding enterprise cycles. Greenwood Publishing Team

Kuttner, Ur. (2008). Obama’ s Challenge: America’ s Recession in addition to the Power of a new Transformative Presidency. Chelsea Environmentally friendly Submitting

Mullineux, A. W. (1990). Enterprise cycles and financial crises. Harvester Wheatsheaf

Taylor, J. B. (1998). Economics. 2nd edition. Houghton Mifflin

Thomas, R. P. (1981). Macroeconomic applications: understanding the United states economy. Wadsworth Pub. Corp

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