Keynesian Model and Macroeconomic policy Essay Example | Topics and Well Written Essays - 1000 words

Keynesian Model and Macroeconomic policy - Essay ExampleThis essay outlines of import foundations of the theory of John Maynand Keynes, one of the most renowned economic thinker of all time. According to his theory, core conduct is subject to periodic changes caused by changes in the determinants of aggregate demand.Aggregate demand is unstable because prices and wages atomic number 18 downwardly inflexible. This decline has no effect on price level but real proceeds falls and can inhabit at its equilibrium indefinitely. It is necessary for governments to intervene and manage the level of demand in the economy in order to obtain and retain full employment. In other words, unless thrifty measures argon taken to offset increase in aggregate demand, real output may remain be diminished full employment.At times of recession, high unemployment levels, and low investments in new equipments and machinery together with low levels of technology characterize the economy. When in a reces sion, Aggregate demand is low in that the sales are low, high unemployment that the jobs suffer meaning that the population has no money ad therefore low spending. To recuperate from a recession, private business investments and governments hold the key because the consumers have limited amounts of money in their pass and therefore they are not the cause of ups and downs of the business cycle. To remedy a recession, the Keynesians can enlarge the levels of investments in the economy or the governments can create public substitutes for the shortages in private investments because the government provides some utility-grade goods for free.Also if the economy contractions are mild, the interest rates can be reduced to induce more(prenominal) borrowing and provide easy credit/loan. This will help to stimulate private investment and retrace aggregate demand to a level rhyming with full employment. For severe contractions, the Sterner remedy of deliberate reckon deficits can be emplo yed either in the form of spending on public whole kit and boodle e.g. free education, health, transport or subsidizing the consumer.A fiscal policy is a government activity that concerns revenue enhancement and public spending. These are the governments tools in their hands in economic policies like maintaining economic growth. A fiscal policy can be expansionary or contractionary. Expansionary fiscal policyIn this case GDP expands. ordinarily the government reduces/cut the taxation level.