Chapter 17.2, Problem 3R

To determine

To evaluateone positive and negative aspect of Keynesian economics.

Explanation of Solution

One positive impact of Keynesian economics is:

Higher employment levels: Employment is dropping in recessionary periods and unemployment rates are rising as companies are cutting back on the size of their labor force. Employment shortages then diminish consumer demand for products and services as families tighten their belt. So it creates a dangerous downward spiral. When government steps in to financially stimulate enterprises, those enterprises start hiring again. When the government spends in public works projects, they specifically increase employment. In all approaches the downward spiral is stopped.

One negative impact of Keynesian economics is:

Borrowing creates higher interest rates and crowding out of finance. In a recession, Keynesian economics proposed an expansion of a budget deficit. It's argued though that this creates crowding out. The interest rate on the bonds is rising for a government to borrow more. This prevents private sector investment, with higher interest rates.

Economics Concept Introduction

Introduction: The key element of Keynesian economics is the belief that for a considerable time the macroeconomy could be in disequilibrium (recession). Keynesian economics supports higher government spending (funded by government borrowing) to kick-start an economy in depression and help recover from a recession.