Price Level, Real GDP, and Unemployment Rate, 1933-1941 Real GDP (billions of Unemployment CPI 2009 dollars) rate (percent) Year 1933 13.0 778 24.9 1939 13.9 1,163 17.2 1940 14.0 1,265 14.6 1941 14.7 1,489 9.9
WAS JOHN MAYNARD KEYNES RIGHT?
Applicable Concept: aggregate
In The General Theory of Employment, Interest,
and Money, Keynes wrote: The ideas of economists and
political philosophers, both when they are right and when they are
wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually
the slaves of some defunct economist. Madmen in authority, who
hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back….
There are not many who are influenced by new theories after they are twenty-five or thirty years ofage, so that theideaswhich civil servants and politicians and even agitators apply to current events are not likely to be the newest.1 Keynes (1883–1946) is regarded as the father of modern macro economics. He was the son of an eminent English economist, John Neville Keynes, who was a lecturer in economics and logic at Cambridge University. Keynes was educated at Eton and Cambridge in mathematics and probability theory, but ultimately he selected the field of economics and accepted a lectureship in economics at Cambridge. Keynes was a many-faceted man who was an honored and supremely successful member of the British academic, financial, and political upper class. He amassed a $2 million personal fortune by speculating in stocks, international currencies, and commodities. (Use
This work made a convincing attack on the classical theory that capitalism
would self-correct from a severe recession. Keynes based his model on the belief that increasing aggregate demand will achieve full employment, while prices and wages remain inflexible. Moreover, his bold policy
prescription was for the government to raise its spending and/or reduce
taxes in order to increase the economy’s aggregate demand curve and put the
ANALYZE THE ISSUE
Was Keynes correct? Based on the above data, 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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