Keynesian Fiscal Policy on the U S Economy 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:

Keynesian fiscal policy on the U.S. economy, we first need to understand that basics of this macroeconomic model. It is also important to remember that this economic model came at a time when the Great Depression had a grip on the U.S. industry and economy.

Economists of the 1930s called for further wage cuts to reduce unemployment and supported higher taxes so people would not "overconsume." John Maynard Keynes's theory was the total opposite and quite simple and practical.

If companies believe they can sell extra output, then they will hire more laborers. Conversely, if demand for their products declines, then they will cut back on production and lay workers off. The downside of layoff workers is that these consumers will have less money to spend and have a negative impact on demand, giving rise to continued unemployment.

This puts the economy is a vicious cycle of lowered demand and high unemployment. Companies by themselves cannot reverse this pattern and that's when government intervention is required. The government needs to intervene and push the economy back into a cycle of high demand and employment.

Of particular importance in the early years of the role of fiscal policy was that many of the early Keynesians (including Keynes himself) objected to the claim that the monetary policy was enough by itself to promise full employment. Interest rates had fallen considerably during the 1930s but even that was no enough to spur private investment. The logic here was easily understandable because even with so much excess capacity, the incentives to build were very little, even with cheap financing. That's why Keynesian fiscal policy focused on increased government spending and lowering taxes to help fill the gap.

It really was the impact of the Great Depression that that got Keynes thinking about income vs. expenditure models and their affect on the U.S. economy. The macroeconomists of the 1930's thought of events like the Great Depression as a "business cycle." Keynes' believed that was that changes in the autonomous components in expenditure, and saving and investment are the precipitators of economic fluctuations. His basic premise was that unemployment and depression lower consumption and thus production, which leads to increased unemployment and deeper depression. An upturn can only occur after inventories are depleted. But unemployment and depression can plague an economy for an undefined period of time.

According to Laurence Seidman, "In the three decades following the publication of John Maynard Keynes's General Theory of Employment, Interest, and Money in 1936, counter cyclical fiscal policy achieved a gradual ascendancy within the economics profession and in the practical realm of economic policy. By the 1960s, it was widely agreed that fiscal policy should be used to counter fluctuations in the economy. To counter a recession, taxes should be cut, cash transfer payments (such as unemployment insurance benefits) increased, and government purchases of goods and services (such as public works construction) increased. But the past three decades have witnessed the decline and fall of counter-cyclical fiscal policy in both theory and practice. The majority of economists have concluded that monetary policy alone should be used to stabilize the economy, and a minority have argued that the government should not use either monetary or fiscal policy for that purpose. Whereas Congress enacted a major fiscal stimulus package to counter the 1975 recession, it did not even consider a serious package in the 1991 recession. "

Many of the Neoclassical economists disagreed with Keynes's theories and believed policies based on his ideas further distorted markets; radical economists regarded these policies as "Band-Aids" -- that would not sustain a healthy economy in the longer run. In Keynes model, changes in independent spending can shift the balance of income and so change the level of production and employment. Any of the three components of autonomous spending, including consumption, investment and net exports can have this effect. In each case, the change in equilibrium income will be larger than the change in the autonomous spending component.

In times of economic crisis, "it is crucial that the public believe that the government is able and eager to use aggressive fiscal policy should a depression threaten. If the economy is hit with a shock that throws it into a recession, will households and business managers expect the economy to recover, or will they expect…[continue]

Cite This Term Paper:

"Keynesian Fiscal Policy On The U S Economy " (2002, December 05) Retrieved December 11, 2016, from

"Keynesian Fiscal Policy On The U S Economy " 05 December 2002. Web.11 December. 2016. <>

"Keynesian Fiscal Policy On The U S Economy ", 05 December 2002, Accessed.11 December. 2016,

Other Documents Pertaining To This Topic

  • U S Economy the May 2007 Economy Presented

    U.S. Economy The May 2007 economy presented a rosy picture: the lowest unemployment rate of the Bush Administration 4.4% (Bureau of Labor 2012. PP. 1), the peak of housing values, strong GDP growth of 3.6% (Trading 2012. PP. 1), a stable inflation rate of 2.2% (Trading 2012. PP. 1), and a normalized non-emergency FED Funds of 5.25% ( 2012. PP. 1). Yet, the collapse was imminent as the

  • U S Economy Evaluating the Current State of

    U.S. Economy Evaluating the current state of the United States economy Although many are of the opinion that the recession that the globe was forced into in 2008 is finally uplifting and signs of economic revival can be witnessed. The resulting high levels of debt and unemployment from the recession had dragged many countries, especially the United States in to a state of economic turmoil. In order to reverse the effect

  • Future of the U S Economy The Most

    Future of the U.S. Economy: The most widely accepted fact is that the American economy is gradually recovering from the recent global recession though the progress seems to be very slow and relatively disappointing. This disappointing growth is partly attributed to the widespread assumption that long-term economic projections are deteriorating across the globe. Some of the major incidents that have characterized the economies of many countries include huge unemployment rates,

  • U S Deficit to Understand the

    S. National Debt Clock, 2011). Too, sometimes when recession hits, deficits rise, and with less economic activity in progressive economies that count on economic activity, deficit spending must occur in order to continue to provide needed goods and services. There are two major factors at work within the U.S. economy, though -- and in essence the global economy since fiscal policies are so tied together in the modern age. Deficit spending

  • Economic Situation What Current Macroeconomic Situation U S

    Economic Situation What "current macroeconomic situation" U.S. (e.g. U.S. economy concerned unemployment, inflation, recession,)? What fiscal policies monetary policies time? Key concepts include paper -- data trends unemployment, inflation, GDP growth, expansionary fiscal policy tools, FOMC, easy money policy tools terms class. What is the current macroeconomic situation in the U.S. The United States is no longer mired in a full-blown recession as it was in 2008, but the process of economic

  • Economics While the U S Is Only Showing

    Economics While the U.S. is only showing the first signs of recovery from the global economic crisis, other nations such as Australia and China have recovered much more quickly. There are a number of factors that have contributed to the disparity in economic performance in the past three years in these different nations. In particular, three factors will be considered. The first is the situation in each country at the outset

  • Keynesian Theory the Response of

    This means that the impact will be the result of natural attrition. So the theoretical firm's wages are resent every once in a while. Productivity will not respond right away to wage changes, but will happen as the natural course of turnover occurs. There are several policy implications for the New Keynesian school. One is that government intervention is required. While new classical economists view recessions as a natural component

Read Full Term Paper
Copyright 2016 . All Rights Reserved