School of Economic Thought: Keynesian School Term paper

The Keynesian theory of economic equilibrium was appeared in 30th years of XX century. Its founder is the English economist John Maynard Keynes. A Keynesian theory began to spread after Great Depression – heavy economic crisis, overcoming the capitalist world in 1929-33. Keynes expounded a theory in a book the “General theory of employment, percent and money”, which entered in contradiction with dominating in that times classic looks on the economy. It was on confessedly opinion, the truth revolutionary theory for that time. In his work the important role of government interference is grounded with economic life. Also in the book Keynes presented in principal new economic model and vehicle of economic analysis. In time going his studies developed and complemented achievements of world economic idea. Presently it is a component part of Keynesian theory.

In fact, Keynesian economics considered and perceived as a theory of total spending in the economy (sometimes called aggregate demand) and its influence on output and inflation. At the same time the term has been also used to describe many things over the years, six principal tenets seem central to Keynesianism.

The main principle of Keynesian theory is a necessity of government interference at establishment of macroeconomic equilibrium. In Keynesians’ opinion of instability and recurrence accompany the market system; it is not apt at self-regulation. In the short-term period of price and rate of salary hardly added a change and can not balance the combined demand and aggregate supply. The balance level of issue is not always coincides with the level of full employment.

However Keynesians’ belief in real and sometimes aggressive government action to stabilize the economy, they defend their position and knew that it was based on value judgments and on the beliefs that

  1. macroeconomic fluctuations significantly reduce economic well-being;
  2. the government is more knowledgeable and even capable enough to improve on the free market.

In their main principles Keynesians arguing that monetary policy is powerless, but of course monetarists had straight opposite opinion and at the same time some monetarists arguing that fiscal policy is powerless. Saying about monetary policy there was a thought that monetary policy can be useful and produce real effect on employment and on output, but not on prices. And at the same time Keynesian models generally take on themselves or maybe try to explain rigid prices or wages. According to their theory Keynesians believe that changes in aggregate demand had a short-run effect on employment and real output, not on prices. Investments were not left in side in Keynesians theory and had their reflection in main theories principles and points. For example Keynesians consider that, if prices are somewhat rigid, fluctuations in any component of spending””consumption, different investments, or government expenditures””cause output to fluctuate.

Widely known multiplier effect had its roots in Keynesians theory and to acknowledgement of this work there is an information that Keynesian models of economic activity also include a multiplier effect; that means the next: output increases by a multiple of the original change in spending that caused it. Looking at the labor areas, were revealed thoughts that prices, and especially wages, respond (but slowly) to that changes which have a place in supply and demand, resulting in periodic shortages and surpluses. Activist stabilization policy was advocated by many Keynesians for reducing the amplitude of the business cycle, which they rank among the most important of all economic problems.

Keynesians thoughts and waitings receive a wide popularity and were taken for the base for the next generation of economists.

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