Government Spending Deficits and Keynesian Economics - amazonia.fiocruz.br

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Learn more about how FutureLearn is transforming access to education. In this film, Dr. John Gathergood explains Keynesian management. View transcript. The concept of demand management, as a necessary https://amazonia.fiocruz.br/scdp/blog/woman-in-black-character-quotes/teen-pregnancy-essay.php that the government needs to undertake, essentially did not exist before Keynes and his new theories of the macroeconomy. Prior to Keynes, the consensus was that Eclnomics natural balance of demand and supply in the economy would keep the economy in equilibrium, and the government need not manage demand.

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This idea was based on the simple demand and supply that underpins economics. Because as the economy produces output on the supply side, the value that it generates automatically feeds through to the demand side. For example, if an economy is producing a million pounds worth of output, that million pounds worth of output is being paid partly in wages to the workers and firms that produce it, and partly in profits to the entrepreneurs that hold the capital and run the businesses.

As the workers and entrepreneurs then spend these earnings, a million pounds of demand is created. In this way, the total value of supply and the total value of demand must always balance.

Government Spending On Economic Performance Essay

Because everything that is made creates value to Keynesiwn individuals making it, which they then spend for their consumption. However, Keynesian economics fundamentally disagrees with the notion that supply creates its own demand. Because in the Great Depression, we observed a period of time where there appeared to be exceptionally low demand in the economy.

Keynes believed this was due to consumers and firms becoming averse to spending the income that they had earned through production.

Because after the radical collapse of the stock market, and the loss of wealth, they were scared to do so in case there was another stock market crash, or some other cataclysmic economic event. Consequently, there was too much supply and not enough demand, as Government Spending Deficits and Keynesian Economics monies that would normally give rise to demand were being saved. Keynes believed that this excess saving was a problem for the economy, and called it the paradox of thrift. And, therefore, so would the ability of firms to sell their goods and services.

So the paradox is that by saving for the future— an apparently prudent activity— an individual can actually damage the economy today. This is where demand management comes from as an economic concept. By bolstering demand, creating demand by spending, the government is stepping into the vacuum, which is left by households and entrepreneurs who are oversaving.

So for Keynes, the government needs to get involved in the economy when households and firms are oversaving and underspending. This is an idea Spendinh President Roosevelt fully embraced in his economic policy. Demand management essentially means that the government makes up for the demand that is lacking from the private sector— from those consumers and firms who are not spending.]