Econ 100

Prof. Danish Khan

Macroeconomic Theory and Real-World Economic Issues

John Maynard Keynes

● Who was John Maynard Keynes?
John Maynard Keynes was a British economist. He is one of the most influential economists
of the 20th and 21st centuries. He is famous for his ideas about how governments should manage the
economy, which is known as Keynesian economics.

● According to Keynes, what should be government policy during an economic downturn or

economic crisis?
During economic downturns, Keynesian economics advocates for government intervention
through increased spending and reduced taxes. The theory states that increased government
spending generates higher demand for goods and services, benefiting economic activity. To finance
this spending, Keynes suggests borrowing, despite potential debt accumulation. He argues that the
adverse impacts of recession outweigh the long-term concerns of debt, and that when the economy
recovers, the government should gradually repay the debt incurred.

● Briefly explain John Maynard Keynes key economic insight about the role of government
spending in the capitalist economy.
According to John Maynard Keynes, governments should actively manage the economy for
stability and growth, particularly in downturns. During recessions, when private spending declines,
aggregate demand decreases, causing economic contraction. To solve this, Keynes advocated for
government intervention through increased spending and reduced taxes. These measures would
pump money into the economy, encouraging consumption and investment. By closing the gap
between supply and demand, stimulating growth and fostering economic recovery.

● What is the Keynesian stimulus package? Identify three examples of Keynesian stimulus
packages?
A Keynesian stimulus package is a government's financial plan to boost the economy when
it's struggling or in a recession. It includes spending more money and cutting taxes.
Three examples of Keynesian stimulus packages mentioned in the video are:

a. The New Deal: Government-funded projects in the United States during the Great
Depression that employed millions of people and helped to rebuild the country's
infrastructure.
b. The Hoover Dam: A massive dam project on the Colorado River that was built during
the Great Depression and provided much-needed jobs and electricity to the region.
c. The 2009 global economic stimulus plan: A coordinated effort by governments
around the world to boost their economies in response to the 2008 financial crisis.
 ● Keynes argued that if the economy is left to capitalists, they would destroy it. What was
Keynes' economic logic behind this argument?
Keynes argued that if the economy is left to capitalists, they would destroy it because
capitalists are motivated by self-interest and short-term gain, which would lead to instability and
boom-and-bust cycles. He believed that governments should intervene in the economy to regulate
these cycles and promote long-term stability and growth.

● According to Keynes, can capitalist economies grow or remain stable without government
regulation or intervention? Explain your answer.
According to Keynes, capitalist economies require government involvement to prevent
stagnation and promote growth. During economic downturns, governments should intervene by
boosting spending and reducing taxes. These measures stimulate overall demand and investment,
leading to economic expansion.

● Explain how the Great Depression of the 1930s changed macroeconomic thinking among
economists and policy makers?
The economic crisis of the 1930s, also known as the Great Depression, prompted economist
Keynes to propose that governments actively participate in stabilizing the economy and preventing
recessions.
Keynes believed that during periods of economic decline, governments should inject money
into the economy by increasing government spending and reducing taxes. This concept went against
the traditional view that governments should refrain from intervening in the economy and that
economic issues would resolve themselves.
Keynes theories, known as Keynesian economics, have had a significant impact on economic
policies since the Great Depression and continue to influence the way governments address
economic downturns.

● Why did Keynes become less relevant in mainstream economic thinking from the 1970s
onwards?
John Maynard Keynes became less relevant in mainstream economic thinking from the 1970s
onwards for several reasons.
1. High inflation of the 1970s
2. Rise of free market ideas
3. Unsustainable Keynesian policies
 ● Briefly identify key economic aspects of 2008 Great Recession? For example, what caused it,
how it affects the economy and people etc.
1. The collapse of the U.S. housing market triggered a financial crisis. Banks and
institutions invested in mortgages defaulted, resulting in losses. The crisis cascaded
throughout the economy as banks became hesitant to lend, reducing business and
consumer spending. This culminated in a recession, characterized by declining
economic activity. The recession severely affected the global economy, causing
widespread job losses and plummeting stock prices.
2. The financial crisis spread to the rest of the economy, as banks became more
reluctant to lend money and businesses and consumers cut back on spending. This
led to a recession, which is a period of declining economic activity.
3. The recession had a severe impact on the global economy. Millions of people lost
their jobs, and stock markets around the world plunged.

● Did Keynesian ideas become relevant after the 2008 Great Recession, briefly explain.
Yes, Keynesian ideas became relevant again after the 2008 Great Recession.

When the­ big 2008 money mess happene­d, leaders worldwide use­d a plan called Keynesian
e­conomics. This was to boost growth and stop a huge money slide. The­y pumped tons of money into
the e­conomy and cut down interest rates. The­se steps were­ quite like the one­s taken during the
historic Great De­pression. Ke­ynes thought the governme­nt should step in and help the e­conomy stay
stable. This clashes with the fre­e market thinking which says less gove­rnment meddling is bette­r.

It's also said that not all economists agre­e on whether Ke­ynesian stimulus packages really work.
Some­say the big government de­bts from these stimulus packages will stop growth in the­future.

● Do you see any parallels in Keynesian ideas and how covid-19 pandemic is handled in the US?
Yes, there are parallels between Keynesian ideas and how the US handled the covid-19 pandemic.
John Maynard Keynes, the British economist, believed that governments should intervene in the
economy to stimulate demand during recessions. This is exactly what the US government did in
response to the covid-19 pandemic. The documentary mentions that the US government spent a lot
of money to try to haul the country out of trouble similar to the spending during the Great
Depression.
Keynesian ideas are controversial. Some argue that government intervention can lead to more debt,
while others believe it is necessary to boost the economy. Some people believe that government
spending is necessary to help the economy, while others worry about the debt.