What Is Keynesian Economics?


Quick Answer

Keynesian economics is the economic theories of John Maynard Keynes. The theory describes the effect of total spending in the economy, called "aggregate demand," on output factors such as unemployment and inflation. Keynes argued for government spending to stimulate weak demand and prevent economic slumps.

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Full Answer

John Maynard Keynes developed his theory of aggregate demand in response to the crisis of the Great Depression. He argued that such disruptions could be prevented if the public sector lowered taxes and invested in make-work jobs projects. This intervention, he argued, has a salutary effect in promoting aggregate demand and promoting manageable growth of the productive sector of the economy. His theory was highly influential during the Roosevelt presidency, and for several decades thereafter, as the U.S. government and the Federal Reserve took activist roles in preventing the cycle of boom and bust that had characterized the laissez-faire economic practice of the 1920s.

Keynesian economists generally object to what is called the business cycle, short booms followed by busts in which jobs are lost, as well as to the generally high rate of unemployment. They argue for closer management of economic cycles and an emphasis on reducing unemployment, which affects the working and middle classes, rather than on reducing inflation, which primarily benefits the wealthy.

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