Keynesian Economics Flashcards
What is Keynesian economic focused on
Psychology, uncertainty and expectations in driving macro decisions (animal spirits is vital)
What do Keynesian economists believe about the free markets
That they are volatile and not self-correcting
What can the volatility of AD be explained by (Keynesian)
Changes in consumer and business sentiment - animal spirits
Examples of the free market not being self correcting (Keynesian)
- recessions - individuals can become trapped in deflationary pressure
- persistent deflation can be as costly as high inflation
What does the paradox of thrift help to explain (Keynesian)
Why a rise in precautionary saving (for security) can lead to a fall in demand and income and a reduction in output, income and wealth
Savings and AD (Keynesian)
-negative multiplier and accelerator effects can drag employment and production
Risks of a deflationary pressure (Keynesian)
- recession = waste of scarce resources (unemployed can’t work and businesses can’t operate)
- recession = produce well below capacity
- need to take measures to lift AD creating an expansion of SRAS
What is the liquidity trap
Normally demand can be boosted by cutting interest rates- but only to an extent (interest rates cannot drop past a certain rate) = monetary policy is powerless.
During the liquidity trap how can AD be boosted (Keynesian)
Only by the Government borrowing more - either to spend directly or give to others via tax cuts
What is a targeted Keynesian fiscal stimulus
During the liquidity trap where we need government spending or reduced taxes to increase AD
Do Keynesians believe that the fiscal multiplier effect is higher for spending or tax cuts
Fiscal multiplier effect is higher for spending
What is animal spirits (Keynesian)
Refers to a broad mix of confidence, trust, mood and expectations - animal spirits can fluctuate quickly as populations change their thinking
What does animal spirits help explain
Why psychology is so important in macroeconomics
What happens when animal spirits are poor
Individuals save more, businesses save more, and because demand and profits are lower than expected- businesses cut back on production and postpone or cancel capital investment projects
What do higher saving and reduced investment have the effect of
Reducing demand and incomes in the circular flow causing an economic contraction
