Economics the Keynesian Economic Theorists Follow an Term Paper

Download this Term Paper in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from Term Paper:


The Keynesian economic theorists follow an economic model that considers three factors in macroeconomic growth. These are income distribution, savings, and investment functions. These factors are derived from the theory's determination of equilibrium in the economy as determined by the relationship between employment, prices, and gross-domestic-product (Padalkina 18). The theory suggests that the economy does not have full employment, autonomous demand-component affect rate of growth, and investment decisions are not dependent on savings. Therefore, the theory suggests that for the economy to experience growth there must be enough demand to push the economy to full employment (Padalkina 18). In addition, the economy experiences growth when there are increases in demand, increasing returns, externalities, and productivity growth.

The Keynesian economics have advocated that discretionary government measures and interventions are necessary in promoting economic growth, increase standard of living, and employment stability. The theorists believe in the use of government intervention, and the use of social policy development. This is in addition to the use of income maintenance programs improves the management of the economy, thereby leading to economic growth (Padalkina 18). The Keynesian theory believes the financial or market-based systems require government intervention and control to reduce destabilization. To carry out this task the government has to use fiscal and monetary policies to stimulate employment and domestic output to motivate economic growth (Padalkina 18).


The monetary theorists like Modigliani believe that macroeconomic growth is achievable by focusing efforts on the role of financial and money markets. These markets are believed to determine the dynamics of aggregate price level, output level and the role of monetary policy in economic fluctuation stabilization (Free 382). This theory believes that the control of money using monetary policies will determine the exchange rates, assets, and value of the economy aggregates. The monetary theorists suggest that to grow macroeconomics requires the control of the amount of money in circulation through interest rates (Free 382). Interest rates determine the cost of financing holdings and cost of holding money, and increase the value of currency as compared to other currencies. In this manner, these mechanisms determine the demand and supply of services, goods, and assets, including measures of money by financial intermediaries, firms, and households.

Monetary theorists find Keynesian economics incomplete; explain monetary policy by promoting macroeconomic stability. The theorists suggest economic growth achievable through the targeting of monetary aggregates, which is the keeping of money supply growth constant (Free 383). This is to promote long-term economic stability. This money supply in maintained by adjusting nominal interest rates to allow the central bank to influence activity level in the economy (Free 383). In addition, through management of inflationary expectations, to moderate and lower inflation. Monetary theorists also believe in the minimizing of volatility in inflation and output in target levels. The monetary theorist like Taylor believe in minimizing inflation volatility on targeting rule, which are the rules built on output and inflation targets (Free 384). However, monetary theorists like Svensson believe in the minimization nominal interest rates.


Budget deficits and trade deficits are dependent on each other. Persistent trade deficits like that seen in the U.S. reduces wealth in the hands of citizens and in the economy, causing high shortfalls in government and unemployment programs. The more the government spends on social and unemployment programs, the more financial resources become scarce (Shannon 27). This scarcity leads to a larger budget deficit, as funds are depleted assisting social support systems. Persistent budget deficit creates massive debt as savings are taken away from capital investments of the government. This in turn creates massive debts for countries that make purchases in a nation with a large and persistent budget deficit (Shannon 27). The persistent budget deficit implies that nations seeking to make purchases will not buy products, sell their holdings of accumulated currency in international foreign exchange market. The debt created by the persistent budget deficit leads to debts in the financial and money markets, causing greater trade deficits (Shannon 27). For this reasons since the U.S.A. is the primary market and whose currency is used as the international exchange in the markets, its persistent budget deficit in the last five years has led to trade deficits in other nations.

In a situations where national savings is available and offers opportunities to improve trade deficits, there are several options available for policy makers to improve the economy. The first option for policy makers is the regulating the markets to increase national savings. This is through tax reform policies that will encourage saving and investment. For the tax reform to work, the policy makers must simplify the tax code, fairer, to promote growth, savings, and job creation. This is by reducing bias to savings and investment in the tax system. A second option is reforms in national spending to reduce the budget deficit, which reduces national savings. This is because budget deficit's effects are felt in future budgets as it reduces national savings, increases interest rates, and crowding of investment. In this option, policy makers have a chance to reduce budget deficit through reduction of expansionary tax cuts and restraining spending. The third option for policy makers is making reforms to social security system. Government spending increases with increment in entitlement programs like unemployment and programs for the elderly, population age, and baby-boom generation retirement. This includes policies on making adjustments for inflation, reducing the higher real benefits for future generations, reducing indexation on benefits to wages.


Supply-side economics or tickle-down economics indicates that a reduction of taxes should stimulate the economy by increasing spending by consumers. The theory suggests that in due time the reduction of taxes will lead to a boost of economic growth that generates a bigger tax base and make up for revenue lost from cuts in taxes (Baumol and Stuart 227).

However, besides best efforts supply-side economics propose the reduction and cutting of some taxes to boost the economy (Baumol and Stuart 227). Tax cuts imply an increment of government spending on entitlement programs like unemployment and programs for the elderly, population age, and baby-boom generation retirement. Tax cuts create inequality in the economy and increases the government's budget deficit from a reduction of income. This is because tax cuts lead the government to use budget surplus, reduce national savings, which in turn leads to larger budget deficits (Baumol and Stuart 227). Supply-side economics tax cuts are directed towards the reduction and cutting of huge taxes for the rich since they have the resources to invest. They also propose the reduction of government regulation on business to increase productivity and investment as a means to increase economic growth (Baumol and Stuart 227). Theorists of this economic model believe tax cuts and investments will lead to a trickledown effect of money to the working class by creating more jobs and increasing income. In turn, increment in income and jobs will reduce government spending on social welfare programs (Baumol and Stuart 227). However, the supply-side economics insistence on fewer government regulations and interventions imply that income gained from tax cuts can be invested in other parts of the world economy apart from the domestic economy. For the theory to work, income from tax cuts must be invested in the local economy for the tickle down effect to work.


The current U.S. national economic policy is to raise national savings by a reduction in the federal budget deficit, reduction of trade deficit, inflation, participating in the right free markets in national industry policies, regulations, and antipoverty efforts (Shannon 28). The reduction of the trade deficit will lead to an increase in investments in many sectors of the economy especially in industry and manufacturing. This is especially seen in the recent increment of manufacturing in the nation, which is causing a slow economic recovery, as more than…[continue]

Cite This Term Paper:

"Economics The Keynesian Economic Theorists Follow An" (2013, March 01) Retrieved October 24, 2016, from

"Economics The Keynesian Economic Theorists Follow An" 01 March 2013. Web.24 October. 2016. <>

"Economics The Keynesian Economic Theorists Follow An", 01 March 2013, Accessed.24 October. 2016,

Other Documents Pertaining To This Topic

  • Keynesians and Marxians Keynesians vs

    There are many potential actions that could have been taken to help prevent the closing of GM and the job losses, plant closings, and economic catastrophe that is likely to occur as the once unstoppable giant collapses (Wolff, 2009). The UAW won above subsistence level wages for GM employees, which should have theoretically had the same effect as an economic stimulus in the traditional Keynesian sense. However, rather than being

  • Keynesian Revolution Analysis and Criticism Believe Myself

    Keynesian Revolution: Analysis and Criticism believe myself to be writing a book on economic theory which will largely revolutionize -- not, I suppose, at once, but in the course of the next ten years -- the way the world thinks about economic problems" John Maynard (Keynes, Letter to G.B. Shaw, January 1, 1935) Prior to the Keynesian Revolution, may economists and politicians viewed economics from a "micro" perspective. They saw factors such

  • Economic Theory Since the Great Depression Many

    Economic Theory Since the Great Depression, many Keynesian economists have been arguing that their basic approach is the best way to deal with issues that could have a long-term impact on the economy. At the heart of this basic philosophy, is the belief that when spending in the private sector is stagnant, the public segment can be able to deal with these challenges. The reason why, is because the government

  • Keynesian Theory New Classical Model

    Keynesian Theory Neoclassical economists are naturally more reluctant than Keynesians to concede that capitalism as a system might be dysfunctional or that markets might be irrational and inefficient, leading to cycles of boom and bust, mass poverty and unemployment, which happened in the 1930s and is happening again today. One of the main assumptions in the classical model is 'full employed equilibrium' or in other words 'absence of involuntary unemployment.' The

  • Romer D 2000 Keynesian Macroeconomics

    Romer explicitly and directly ties the changes that have been made to the model to the historical shifts in the world's (and the United State's) economy; by noting that inflation was simply not a major issue for the first decades of the models' use and existence, the model's efficiency and accuracy during that period are easily explained. Just so are the inefficiencies of the model in a world where

  • Forming an Economic Union There

    This is exactly the case with the European Union; a European-Union-Member-State that fails to pay on its public arrears will cause weakening of capital amidst its financers. The danger that this financial catastrophe will extend towards the remaining Euro-Area would position the ECB under immense stress to help and rescue the dissolute Member-State, despite the fact that this move may undermine Euro-Area value in the progression (Eichengreen and Wyplosz,

  • Public Administration Most Important Economic

    Recession is a period characterized by increased unemployment rate, lower inflation, lower spending, reduced production and stocking. Different economic theories such as the Classical, Neo-classical, Keynesian and the Growth curve and life cycle theories argue differently about the economic cycles. The neo-classical theorists for example argue that interest rates are crucial in the shift towards the different cycles and therefore by regulating the flow of funds (increasing or decreasing)

Read Full Term Paper
Copyright 2016 . All Rights Reserved