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Of, or pertaining to an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The General Theory of Employment, Interest and Money, published in 1936 in response to the Great Depression of the 1930s, and extensively extended by a large body of followers before and after his death in 1946.
Keynesian economics is referred to as the thoughts and theories developed by John Maynard Keynes. Keynesian economics basically deals with the theory of total spending which is known as aggregate demand in economics. Keynes also found out the extent of the effect of aggregate demand on output and inflation. Keynesian economics can be summarized in six major doctrines, which are the central ideas of Keynes work.
Keynesian economics, also called Keynesianism, is named for economist John Maynard Keynes. His 1936 book “General Theory of Employment, Interest, and Money” explored the principles of Keynesian economics. Unlike classical economics, which views the economic process as based on continuous improvements in potential output, Keynesian economics asserts the importance of the aggregate demand for goods as the driving factor, especially in downturns. Keynesian economics advocates government intervention, or demand-side management of the economy, to smooth out the bumps in business cycles and achieve full employment and stable prices. To stimulate the economy according to Keynesian economics, government intervention takes the form of government spending and tax breaks. To curb inflation, Keynesian economics believes the government should cut spending and raise taxes.
According to Keynesian economics, aggregate demand is largely influenced by several types of economic decisions. Economic decisions can be public or private and they behave in a random manner. Public economic decisions can be monetary and fiscal policies. According to the Keynesian point of view monetary policy had very less power to influence economic decisions. But with time most of Keynesians believe that fiscal and monetary policies both have the capacity to affect aggregate demand.
Keynesian economists believed that irrespective of the type of changes taking place in aggregate demand, they affect real output and employment most. Changes in aggregate demand can be anticipated or unanticipated and these changes have comparatively less effect on prices. Keynesian economists believe that monetary policies have a real effect on output and employment if prices are rigid. Keynesians believed that prices were to some extent rigid ad fluctuations in output can result from fluctuations in spending, consumption, investment and government expenditure.
Prices in economics mainly wage respond slowly to fluctuations in supply and demand and this resulted in periodic deficiencies and surpluses. Keynesians believe that unemployment is depended on aggregate demand, where prices adjust gradually. Unemployment is a variable component according to Keynesians as sometimes it is on the high font and sometimes it is low.
Keynesians supported stabilization policy as they believed that it was necessary to minimize the amplitude of the business cycle. The amplitude of the business cycle was a significant economic problem. Keynesians also advocated the system of fine-tuning, which means that taxes and money supply can be adjusted in such a way that the economy is always at full employment.
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This glossary post was last updated: 29th March, 2020