Keynes Flashcards
What did Keynes argue about Roosevelt’s orthodox budget policy?
That it lead to the relapse into the recession
Deficit financing
When government spends more than it receives
What was the major economic legacy of Roosevelt with Keynes’ help?
To establish a global economic order with the world bank
What did jean Baptiste say believe in?
The invisible hand and that supply creates its own demand
Why did Keynes disagree with Jean Baptiste say?
He realised that people were adverse to spending when confidence was low even if supply was high
Paradox of thrift
This means although for an individual it is beneficial to save, if everyone does it, it will damage the economy since firms will find it harder to supply.
Demand management
Keynes believed if everyone is saving I’m the government should step in to increase demand.
How did Roosevelt manage demand?
By using deficit financing
What is a problem with demand management through deficit financing?
The government don’t have perfect information so government failure may occur. Also the governments credit rating may drop as they borrow.
What 3 ways did Keynes promote of increasing purchasing power?
- tax cuts which promote personal consumption
- getting businesses to invest more through long term interest rates
- government stimulating the economy be spending borrowed money
Why did Keynes insist on using borrowed money instead of tax money?
Using tax money would mean increasing taxes and therefore decreasing spending further
What approach did Keynes attack?
The approach of increasing the money supply
Differences in post 2008 recession I UK and Keynes in 1933
- Banks were restricting credit to small businesses to reduce risk
- There was a large fiscal deficit so government spending rose (borrowing rose to 9% of GDP)
- Britain is a more open economy than USA so purchasing power leaks into imports
How did policy makers react in 2008?
- they cut interest rates immediately and began quantitative easing
- fiscal policy was used by raising public spending and cutting taxes
How would Keynes say we could have prevented the 2008 financial crisis?
- he would say the financial system has been made more vulnerable by the removal of restrictions on free capital, this allows increased speculation
- we could have used greater banking regulation to prevent it happening in the first place
