John Keynesian Economics Case Study

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Recommended: Classical and Keynesian economic theories

Term paper Question 1: One of the important fathers of modern macroeconomics whom his theories and principles have been having a great influence on the economies of many regions across the globe, the British economist John Maynard Keynes. He changed the classical economics into his great influential ideas in economics known as Keynesian economics, which was presented in his best book called "The General Theory of Employment, Interest and Money" that discussed the basis on modern macroeconomics. The classical economists before the great depression claimed that if wages fall unemployment also falls, because workers will accept lower wages as a way to get a job, so the nation decreases the wages in order for workers to work with low wages and increase employment, however this did not happen, unemployment was increasing and Keynes was the savior. According to Keynes, the reason of unemployment is not wage rate but aggregate demand, and …show more content…

Keynesian theory states that increase in government spending will increase demand which boosts the economic activity, and consequently lower unemployment. The classical model stated that the economy should always be at full employment, if it is not at full employment then it sacrifices the wages by decreasing it to reach full employment again. However, Keynes argued that if wages decrease the aggregate demand will be less, as well as full employment will not be reached if aggregate demand keeps falling. As shown in graph 1.1 full employment (point X) is when long-run aggregate supply, short-run aggregate supply and aggregate demand intersect, it is the equilibrium point and

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