Reference no: EM133651465
Read the "Keynesian Economics" information and answer the following questions.
When Roosevelt became president in 1933, he did not have a clear agenda or strong ideology. He believed that the country needed "bold, persistent experimentation." As the Great Depression deepened, Roosevelt and his advisors turned to a new set of economic tools developed by John Maynard Keynes. Employing Keynesian ideas became central to Roosevelt's policies. The main ideas behind Keynesian economics were laid out in Keynes's 1936 work, The General Theory of Employment, Interest and Money. In this work, Keynes argued that classical economics failed to predict the Great Depression and could not provide tools for alleviating the economic crisis. The key difference between Keynesian and classical economics was Keynes's assertion that the government needed to use fiscal policy to even out major fluctuations in the business cycle. Classical theories emphasized short-term balanced budgets, whereas Keynes recommended deficit spending during times of crisis. Deficit spending, he argued, would spur economic growth and end the crisis. According to Keynes, deficit spending increases aggregate demand (AD), and when the economy is operating below its full-employment level (full employment is represented by YF on the graph in your study guide)-for example, at the point Y1-then an increase in AD would raise output without raising the price level. This would spur a recovery because there would be greater employment and greater income in society without serious inflation offsetting these gains. Once the economy was growing, the government could reduce its spending and allow private spending to maintain and grow aggregate demand, completing the economic recovery. The government would then increase taxes to run a surplus that would offset the debt incurred during the period of deficit spending, resulting in long-term balanced budgets.
A. Why do you think Keynesian ideas appealed to President Roosevelt?
B. Under what circumstances would deficit spending to increase aggregate demand have a negative effect?
C. Keynesian ideas were dominant in the US from the mid-1930s through the 1970s, yet during that time the national debt increased steadily rather than going up and down. Why do you think the application of Keynesianism resulted in increasing deficits rather than a movement back and forth between deficits and surpluses as Keynes recommended?