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“YOU’RE THE ECONOMIST: Was John Maynard Keynes Right?” in Chapter 20. Was Keynes correct? Based on...

“YOU’RE THE ECONOMIST: Was John Maynard Keynes Right?” in Chapter 20. Was Keynes correct? Based on data in the sidebar, use the aggregate demand and aggregate supply model to explain Keynes's theory that increases in aggregate demand propel an economy toward full employment.

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Answer #1

The 1930s saw the greatest rcession that the world has ever seen with unemployment rates reaching as high as 25%. The prevalent classical economic theory proposed laissez fair- no government intervention which only worsened the economic condition.

John Maynard Keynes, a British economist, proposed an entirely different economic theory. According to him, the recession was mainly due to fall in aggregate demand which further lowered the business confidence and reduced investement in the economy.

He proposed increased government spending, reducing taxes and using other fiscal measures to increase amount of money in the hands of people which in turn will increase aggregate demand, investment in the economy, bringing the economy back to full employment level.

Infact, Keynes was right. Following reduced taxes and increased government spending brought the economy back to full employment level.

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