Demand-side economics is generally known as Keynesianism, named after the English economist John Maynard Keynes. He believed that governments should force interest rates down by printing money and lending it from the central bank at a discount. This would put more money in consumers\\ ' hands and encourage them to spend and consume more, thus creating an incentive for investment. This helped to solve some of the problems, but in the long run it is extremely inflationary, because with the increase of the money supply it becomes devalued. Keynesianism also calls for the government to spend more to try to help the economy grow.
Monetary policy is controlled by the Central Bank and influences money supply . Fiscal policy uses changes in taxes and government spending to affect overall spending and stabilize the economy. When lowering taxes the people have more to spend then the government decreases spending and the economy slows down therefore the economy stabilizes. The objective of fiscal policy is the governments’ typical use fiscal policy to promote strong and sustainable growth and reduce poverty. During periods of recession congress has the option to decrease taxes to give households more disposable income so they can buy more products.
The U.S. never fully recovered from the Great Depression until the government employed the use of Keynes Economics. John Maynard Keynes was a British economist whose ideas and theories have greatly influenced the practice of modern economics as well as the economic policies of governments worldwide. He believed that in times when the economy slowed down or encountered declines, people would not spend as much money and therefore the economy would steadily decline until a depression occurred. He proposed that if the government injected money into the economy, it would help stimulate consumers to purchase more and firms would produce more as a result, in a continuous cycle. This cycle is called the multiplier effect.
Financial Repression in the United States In times of economic hardships and massive amounts of accumulated debt, governments must look at ways in which they can resolve such indebtedness and put their respective economies back on track towards periods of healthy growth and hopeful prosperity. The United States currently finds itself in such a situation- and with few viable options for remediation, many economists believe that “financial repression” is the answer. The term was created in 1973 via the works of two economists at Stanford University named Edward Shaw and Ronald McKinnon (Reinhart), and refers to the process of reducing debt by “repressing” the wealth within a country. When implemented, the basic goal of financial repression is to liquidate the value of government issued debt by creating an environment of negative interest rates-that is, interest rates that are lower than what would normally exist in a free market. Over time, this process (along with a steady dose of inflation) is intended to reduce the national debt-to-GDP ratio by literally de-valuing government debt.
Two very important economic policies that point in different directions of fiscal policy include the Keynesian economics and Supply Side economics. They are opposites on the economic policy field and were introduced in the 20th century, but are known for their influence on the economy in the United States both were being used to try and help the economy during the Great Depression. John Maynard Keynes a British economist was the founder of Keynesian economic theory. Keynesian economics is a form of demand side economics that inspires government action to increase or decrease demand and output. Classical economists had looked at the equilibrium of supply and demand for individuals, but Keynesians focuses on the economy as a whole.
After the Great Depression in 1929 John Maynard Keynes had attempted to provide a solution to much of the economic instability that had occurred in the US. Keynes’ revolutionary solution to the problem, later known as Keynesian economics, had proposed the idea of fiscal policies, being government intervention in the economy in the form if fiscal spending to aid the economy’s growth. In the years that followed an economist by the name of Milton Friedman, a known monetarist, challenged Keynes’ theory by suggesting that fiscal spending should be limited. Friedman argued that fiscal spending can only worsen an economy with small term effects, which not only will not be effective or felt, but will make the situation worse. Friedman’s take on the issue was that the government should be less involved and allow the free market to tune things out.
He left because he disagreed with the conclusion of blaming Germany for WW1, inspiring him to write his book on economics “The Economic Consequences of Peace”. Keynes was for the idea that Governments should step in to fix short run macroeconomic problems, challenging ideas of the classical economists who believed that the market corrects itself. In recession times the government should increase their spending to increase the GDP, and keep the income flow flowing, and in good times were GDP is at its maximum level governments should cut back on spending and reduce the GDP, to prevent price levels to shoot up past what is a good level for the majority. Keynesian Economics is a demand focused economics, and focus on solving the short-term problems. A well-known example of this is the actions taken to solve the problem of the Great Depression, where Governments used a “stimulus package” to increase Aggregate Demand and increase the flow of economy, so it wouldn’t be stuck in a recession.
Fiscal Policy vs. Monetary Policy With America in recovery from the attacks on our freedom and our economy, many wonder if we will return to phase one (expansion) and how long it will take to reach phase two (recession) again. The Keynesian Theorists of America believe that the government should actively pursue Monetary policies (enacted by the Federal Reserve Bank) and Fiscal policies (enacted by Congress) to reach adjustments to price, employment, and growth levels. In our full market economy, we must use these economic policies to control aggregate demand. When these policies are used to stimulate the economy during a recession, it is said that the government is pursuing expansionary economic policies. Fiscal Policy is described as changing the taxing and spending of the federal government for purposes of expanding or contracting the level of aggregate demand; these are designed to increase short-run economic growth.
As newly acquired funds pour into businesses, businesses believe the supply of funds for investment has greatly increased and the interest rate falls. Businesses invest this money at a higher rate in the capital goods market, as they have been “tricked” into believing there has been an increase in saving by the consumer. Soon this bank caused inflation will trickle down the economy in the form of higher wages. The consumers, who have not actually increased their preference for saving, rush out to by consumer goods. The investment in capital goods by businesses turns out to be a waste.
In order to control the money supply the government cut borrowing and spending, which in theory would reduce the money supply, inflation and unemployment but interest rates had to rise to stop consumer borrowing, which in turn increased the exchange rate. High interest rates curbed consumer borrowing, which reduces demand for products, along with a high exchange rate ruining demand for exports ... ... middle of paper ... ...ector borrowing is not the enemy of unemployment. If the government borrows too much then there will have to be increases in taxes, mainly corporation tax and this will also contribute to some unemployment, but the public sector does help employment in some ways. Education and training (funded by the government) provides a skilled, desirable workforce, which will encourage British firms to employ British workers instead of looking for other skilled workers in an increasingly globalized world. The National Health Service also reduces the amount of residual unemployed and therefore contributes to keeping employment levels high.