This article has multiple issues. Wikipedia editor’s personal feelings about a topic. This argument rests upon the assumption that if a surplus of goods or services exists, they would naturally drop in price to the point where they would be consumed. Keynes argued that because there was no guarantee that the goods that individuals produce would be met with demand, periodic unemployment could the principles of macroeconomics pdf expected from time to time, especially in the instance of an economy undergoing contraction.
He saw the economy as unable to maintain itself at full employment automatically, and believed that it was necessary for the government to step in and put purchasing power into the hands of the working population through government spending. Keynes argued that when a glut occurred, it was the over-reaction of producers and the laying off of workers that led to a fall in demand and perpetuated the problem. Keynesians therefore advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. Waist-up profile of an older man wearing a dark suit. This is how monetary policy which reduces interest rates is thought to stimulate economic activity, i. Investment and consumption by government raises demand for businesses’ products and for employment, reversing the effects of the aforementioned imbalance. This is called deficit spending.
Two points are important to note at this point. To the observation that these were, in fact, the prevailing conditions throughout the industrialized world for many years during the Great Depression, classical models could only conclude that it was a temporary aberration. The purpose of Keynes’ theory was to show such conditions could, without intervention, persist in a stable, though dismal, equilibrium. By the end of the Second World War, Keynesianism was the most popular school of economic theory in the non-Communist world.