ECON 2301

Dr. Nazemzadeh

10/16/00

Keynesian Economics

Up until the Great Depression the United States used the “classical” or “conservative” version of capitalism. This version stated that the economy was self-correcting and was best left untouched. The depression brought a monumental decline in the economy and many individuals to search and unveil a new version of capitalism. In 1936, John Maynard Keynes published a book explaining his views on the economy and how the economy could be restored.

Unlike the classical version of economics, Keynes believed that the aggregate demand was unstable. He thought that an increase in the aggregate demand, and an expansionary fiscal policy to deal with problems which may arise, would bring the United States economy out of the depression. As the aggregate demand increases the price level falls, influencing people to buy more at lower prices and an increase in the amount of goods and services demanded. This would ultimately result in a government budget deficit where the total government expenditures exceed the total government revenues. By shifting the aggregate demand, the equilibrium level of aggregate output and employment would rise.

Keynesian economics flourished and ultimately brought the nation out of the Great Depression. It encouraged full employment and price stability. Unfortunately, prices are not stable for long periods of time and as inflation increases the Keynesian model applies less and less.

Word Count: 226