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John Maynard Keynes. Keynesian economics


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Based on the idea of the need for state regulation of the economy. No more self-adjustments
For the prosperity of the economy:
All have to spend as much money as possible;
The state should stimulate aggregate demand growth even by the budget deficit, debt and unsecured issue of money.

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John Maynard Keynes. Keynesian economics

  1. 1. John Maynard Keynes Keynesian economics Abdul Ruhulla Financial University under the Government of the Russian Federation (1883-1946)
  2. 2. The Early J. M. Keynes  Born in 1883 in Cambridge, England  Son of John Neville Keynes  Neville was a professor of Economics and Logic at Cambridge Univ., and wrote on Economic Methodology  Won a scholarship to Eton  Boy Genius  Won prizes for his work in the classics, mathematics, history, English essays  Wrote papers on contemporary social problems, participated in crew and debate, acted, read everything  Became an expert in medieval latin poetry  Part of Eton’s social elite  Won a scholarship to King’s College, Cambridge
  3. 3. Keynes as a College Student  President of the Student Union  President of the University Liberal Club  Rowed, studied philosophy, played bridge, visited art galleries, collected rare books, went to the theatre  Became a member of the “Apostles”, a secret and highly exclusive Cambridge intellectual society  Became a member of the literary set called “the Bloomsbury Group.”
  4. 4. Keynes After College  Studied economics for perhaps 1 year, but did poorly on his exams.  Took a civil service exam and took a job at the India Office for 2 years.  1908, his father managed to get him a job as a lecturer at King’s College. Later he became a Fellow.  1911, he became editor of the Economic Journal.  Worked at the Treasury during WWI.  1921, he published A Treatise on Probability. This was his dissertation. It won him a fellowship at King’s College, Cambridge.  Marries Lydia Lopokova.
  5. 5. Keynes, Inter-war Years  Keynes wrote the Economic Consequences of the Peace (1919), regarding reparation payments  Best Seller  Made him a public celebrity  1923, Tract on Monetary Reform (against returning to the pre-war gold standard)  Economic Consequences of Mr. Churchill (1925, warned of depression)  1930, Treatise On Money  Makes millions in the stock market, commodity, and forex markets.  1936, General Theory of Employment, Interest and Money  1937, he has a serious heart attack
  6. 6. Keynesian Economics The main ideas
  7. 7. Keynesian Economics  Based on the idea of the need for state regulation of the economy. No more self-adjustments  For the prosperity of the economy:  All have to spend as much money as possible;  The state should stimulate aggregate demand growth even by the budget deficit, debt and unsecured issue of money.
  8. 8. Laissez-faire
  9. 9. Business cycle During Great Depression He outlined the limitations of Microeconomics theory. Due to unemployment and poverty, the demand for good and services dropped. Many workers were unwilling to accept lower wages.
  10. 10. Keynesian Economics Impact  Aid in the formation of the 20th Century’s economy  Consequences of the Great Depression were lessened  Government took an active role in the country's economy (Departure from neoclassical theories)
  11. 11. Intro to Macroeconomic Theory  High unemployment rate greatly influenced the development of macroeconomics  Challenged the established neoclassical economics  Introduced important concepts such as:  Consumption  Multiplier  Marginal efficiency of capital  Liquidity preference  Government's responsibility is to  Reach and maintain full employment  Regulate markets and free trade END OF NEOCLASSICAL THEORIES! such as Laissez-faire
  12. 12. Debates Over Aggregate Supply Classical Theory vs. Keynesian Theory 13
  13. 13. Three Ranges of Aggregate Supply 1. Keynesian Range - Horizontal at low output 2. Intermediate Range - Upward sloping 3. Classical Range - Vertical at Physical Capacity Price level Real domestic output, GDP AS Qf 14 Keynesian Range Intermediate Range Classical Range
  14. 14. Consumption Function C0 Yd C c = mpc = C/Yd = marginal propensity to consume C Yd C = C0 + mpc x Yd M = 1/(1-mpc) C = Consumer spending A = Autonomous consumption YD = Real disposable income M - multiplier Shows the relationship between real disposable income and consumer spending, the latter variable being what Keynes considered the most important determinant of short- term demand in an economy.
  15. 15. d Planned expenditure exceeds real GDP Real GDP (trillions of 1992 dollars per year) Aggregateplannedexpenditure (trillionsof1992dollars/year) 4.0 6.0 8.0 10.0 0 2 4 6 8 10 a b c e f Real GDP exceeds planned expenditure 45 o line Equilibrium expenditure I G C0 Total Expenditure C+I+G Income-Expenditure model Explains fluctuations in production of goods and services and spending. The model basically states that we produce as many goods as will sell on the market and fluctuations in production and expenditure are tied to keep an economy stable.
  16. 16. The General Theory Microeconomics and macroeconomics do not operate on the same basis. One cannot assume that what is true for the economic agent at the level of the individual consumer or firm is true in aggregate. This amounts to the fallacy of composition.  In microeconomics, relative price effects dominate. This is not true in macroeconomics. In macroeconomics, income effects dominate, making income more important in determining aggregate economic behavior.
  17. 17. The General Theory Therefore, consumption depends primarily upon income, not interest rates.  C  C(r), but rather C = C(Y)  “People don’t change their standard of living simply because the interest rate changes a few points.”
  18. 18. The General Theory Money plays a key role in the economy. The use of money leads to uncertainty, and makes “piercing the veil” impossible. A money economy is fundamentally different from a barter economy. The classical dichotomy cannot hold.  Interest rates are established in the money market.  People may rationally hoard money, holding money for purposes other then making transactions. Equilibrium is not AD = AS. It is a state that persists.
  19. 19. Why did the Keynesian theory didn't work?  Government spend too much money on post-WWII events. (Examples: Vietnam war, sending the first man to the moon)  The Keynesian solution stopped working  Unemployment became worst  It created Inflation  In conclusion Keynesian theories work best on economics catastrophes
  20. 20. Thank you for attention