Keynesian Economics Essay

737 words - 3 pages

The U.S. never fully recovered from the Great Depression until the government employed the use of Keynes Economics. John Maynard Keynes was a British economist whose ideas and theories have greatly influenced the practice of modern economics as well as the economic policies of governments worldwide. He believed that in times when the economy slowed down or encountered declines, people would not spend as much money and therefore the economy would steadily decline until a depression occurred. He proposed that if the government injected money into the economy, it would help stimulate consumers to purchase more and firms would produce more as a result, in a continuous cycle. This cycle is called the multiplier effect. Keynes ideas have resonated throughout the economic world and are still being put into practice in today’s economy.

Keynes asserted that because the private sector is unpredictable, it may have a negative impact on the economy, and thus government interference is necessary to raise the GDP. He believed this is done by inserting money into the economy or investing. Many economists have begun advocating major government intervention in order to balance out today’s economy. Our generation has witnessed Keynes theories be put to use in the U.S. and around the world. Some of these include the government bailing out major companies, and monetary stimulus to households. Keynes created the Aggregate Expenditure Model in order to achieve equilibrium in the economy and prevent recessions or depression from occurring.

The Keynesian Aggregate Expenditure Model is a graphical model used to analyze “the basic components of Keynesian economics and to identify Keynesian Equilibrium as the intersection of the aggregate expenditures line and the 45-degree line.”(1) The Keynesian Equilibrium is achieved when “aggregate expenditures are equal to aggregate output.”(2) This is shown using the income expenditure model as the meeting point of the aggregate expenditures line and the 45-degree line. “The aggregate expenditures line is the summation of consumption expenditures, investment expenditures, government purchases, and net exports. The 45-degree line represents all combinations in which aggregate expenditures equal aggregate output. Keynesian equilibrium is also represented by the saving investment, or injection-leakage, model as the intersection between the injection line (investment expenditures, government purchases, and exports) and the leakage line (saving, taxes,...

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