Analyse how the macroeconomic problems outlined above would be approached by Keynesian economists

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Analyse how the macroeconomic problems outlined above would be approached
by Keynesian economists. In your answer try to capture the essence of the
Keynesian approach and attempt to raise and discuss some of the criticisms that
have been levelled at Keynes.
John Maynard Keynes believed that short run productive activity is influenced by
aggregate demand, the total spending in the economy. The macro economic
problems are a lack of confidence, low GDP, unemployment and private sector
demand. To solve these issues, Keynesian economists would utilise government
spending to offset a recession and hopefully spur unemployment to decrease and
confidence to increase, even if it results in a fiscal deficit. Keynes was a strong
believer in capitalism. He thought the economy would be best run as a mixed
economy, with both government and the private sector playing an important role.
Government spending would inject into the circular flow and pump more money into
the economy, thus bringing everybody out of recession and solving all the problems
that arise with it.
Economic collapse is simply caused by a lost incentive to produce. In turn, this leads
to unemployment and low GDP. The leakages outweigh the injections. Keynes argued
that to boost employment, real wages had to go down. However, doing so would result
in a drop in aggregate demand. This would in turn reduce business sales revenues
and expected profits, along with confidence: investment in new plants and equipment
would become a huge gamble. It was a viscous circle in which not everybody could be
pleased all the time and one thing seemingly unconnected to anything else can affect
the entire economy. Cutting prices isn't a solution either, as consumers would notice
the steady fall and save their income, anticipating a further reduction. Aggregate
demand would plummet even further. Falling investment from falling consumer
demand can result in excessive saving: saving beyond the necessary amount for
investment. This can also be down to pessimistic business expectations and outlooks,
as well as interest rates and inflation. Classical economists have always maintained
that unemployment is caused precisely by wage rates not being allowed to fall freely.
Keynes argued this would `slash purchasing power' and intervention from the
government is required. According to Keynes, the solution to unemployment issue
brought about by a recession was an increase government spending to pump more
money into the circular flow, raise business expectations and confidence, increase
investment, reduce inflation and excessive saving and ultimately drive aggregate
demand up again. Keynes suggested the government purposely adopted a set of
budget deficits in order to bring the economy positive again, calling this his fiscal
Gross domestic produce is made up of consumption, investment, government
spending and exports minus imports. Consumption refers to real purchasing power of
a household, concerning the part of the disposable income that does not go into
saving. Investment defines as `action of putting something in to something else' in
essence, gaining assets with hope of getting a future return from them. Government
spending is the government putting money into public and private sectors in order to
promote investment and in turn jobs. Keynes was the first economist to advocate
government deficit spending as part of a fiscal policy to cure an economic downturn.
Finally imports and exports result in a balance of payments. Every economy wishes for

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GDP is a common measurement of national income and can be
used to judge a countries wealth and poverty by. If any of the factors of GDP increase,
there will be an overall increase in GDP itself. This will affect aggregate demand,
causing it to rise, along with the economy. And obviously viceversa. Real GDP is
dependant on price levels and can determine inflation. Once again, we are back to the
viscous circle. If the government increase government spending, then the GDP figure
would rise.…read more

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Ricardo 150 years ago" (Paul Fabra, economics editor of Le
Monde, writing in The Times, 11 February,1969).…read more


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