Question

What is the basic thrust of Keynesian demand-side policies? Why was economic policy based on Keynes' ideas effective in promoting prosperity in the 1960's? Why was this policy less effective in the 1970's?

Answer 1

Keyens believed in the principle of effective demand. Effective demand is that level of aggregate demand which become equal to the aggregate output and thus determines the equilibrium national income. He believed in the role of government intervention that could take the economy out of depression as the government expenditure would lead to employment and boost demand in the economy. However with the increase in oil prices in 1970s that pushed up the energy cost, the Aggregate supply decreased. This adverse supply shock caused stagflation which could not be corrected by Keneysian deamand management. Using expansionary policy would have increased the price levels further. Hence it was less effective.