John Maynard Keynes

Question 1

What was the Wall Street Crash?

Answer 1

The collapse of the US stock market, which began on ‘Black Thursday’ (October 24, 1929) with the largest sell-off of shares in American history. Rampant speculation across the 1920s had led to overinflated share prices and millions investing their savings in the stock market, in a (mistaken) belief it would grow forever

Question 2

What was the Great Depression?

Answer 2

A worldwide economic downturn which began in 1929 and lasted until 1939. A drastic decline in consumer spending and business investment led to output and prices plummeting. A sharp rise in unemployment (up to 25% in the US and higher in other parts of the world) led to widespread poverty and instability

Question 3

What was the New Deal?

Answer 3

A series of government programs instituted from 1933-38 by US President Franklin Roosevelt, in an effort to fight the Great Depression. The largest federal spending initiative in US History, the New Deal sought to stabilise the economy, provide relief for the poor and reform the financial system to prevent another crash

Question 4

How does Keynes view rationality in decision-making?

Answer 4

Keynes believed that many economic decisions are not made rationally

This is especially the case when it comes to stock markets, where people’s decision-making is influenced by the ‘liquidity’ of an asset

Actors become hyper-focused on short-term trends and ignore long-term prospects – irrational behaviour which Keynes compares to a casino

Question 5

How does irrational decision-making impact the business cycle?

Answer 5

Irrationality exacerbates the booms and busts of the business cycle

This stems from the non-rational belief that short-term conditions will always be long-term conditions, leading people to be overly confident or negative

In the case of a bust, this becomes a self-fulfilling cycle – people withhold spending, which leads to reduced investment and thus higher unemployment

Question 6

What role does Keynes believe that the government should have in economic activity?

Answer 6

Keynes believed that the government must intervene to counter the irrational behaviour of individuals and prevent drawn-out booms and busts

In the case of a bust, when consumers are not spending, it is necessary for the government to spend or encourage consumer spending

In this way, the government helps to stabilise economic activity

Question 7

How was Keynes responding to Marshall?

Answer 7

Keynes’ view of macroeconomics, including concepts of aggregate supply & demand, were influenced by Marshall’s ‘Principles’.

However, Marshall applied his theory over a period of time, assuming equilibrium – Keynes looked at the short-term, and how irrational behaviour can lead to disruption

Question 8

What was Keynes’ impact on macroeconomic policy?

Answer 8

Keynesian economics defined the policymaking of Western nations from 1936-1973, where governments took on a much more active role in spending, economic regulation and the provision of services such as welfare