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Economy Foundation course 1 - Essay Example

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JANUARY FOUNDATION COURSE 2013 Economics The Golden Age of Capitalism between 1945 and the mid-1970’s showed the effectiveness of Keynesian economic policies. However, rapidly rising inflation and low economic growth in many countries in the world after the mid-1970’s showed that Keynesian economic policies had flaws according to the monetarists…
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Economy Foundation course essay 1
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Economy Foundation course 1

Download file to see previous pages... Such impressive growth was the outcome of Keynesian policies, such as the needs of intervention by the government (Discover the networks, 2012). This period was the golden age of Keynesianism. However, the world economy faced the big recession, which resulted from not only rising inflation and unemployment but also dropping economic growth, after 1973. People began to believe the newly risen Monetarism, which claims fiscal policy is not useful, due to the failure of Keynesianism. This essay will show the characteristics and differences between Keynesian economic policy and Monetarist economic policy as well as the reason why the Golden Age collapsed. Finally the essay will highlight which policy is more suitable in the currently economic situation. Keynesian Economic Policies Keynes emphasised that aggregate demand in the economy can be influenced very effectively by altering the levels of government spending as well as tax rates (Nelson, 2006). The neoclassical economic theory could not explain the factors that led to the economic collapse of the country and was also unable to make some appropriate public policy that would help to solve the economic crisis. While the need for any kind of government intervention was rejected by the orthodox neoclassical economists, Keynes advocated that inactiveness on part of the government would only worsen the condition of unemployment in the economy and aggravate the situation of economic downturn. John Maynard Keynes stated that in order to improve the economies the governments should raise levels of public spending and cut taxes. Neo classical economists did not approve of this action in the given economic context since there was an established view embracing the lassie faire mode of economy that claimed that in the market economy, if the market equilibrium is disturbed, the economy has the potential to make an automatic recovery, without necessitating any government intervention. In contrast to this, Keynes argued that in an economy in which there is high rate of unemployment with low aggregate demand, the economy would ultimately get weaker if indefinitely demand is allowed to fall short of the productive capacity of the economy. The solution proposed by Keynes was to stimulate the demand in the economy. The policy directions made by the economists were discretionary fiscal policy changes that were to the made by the government in accord with the condition of the economy. When the country is in recession, the government is responsible for increasing public spending so that it raises the aggregate demand in the economy. Higher levels of government spending would boost demand both directly and indirectly. Government's expenditure increases the incomes of the workers who make higher levels of demand. This increases not only the production of goods and services in the economy but also the incomes of the workers further. This is known as government expenditure multiplier that sets off “a chain reaction of increased demand from workers and suppliers” (Nelson, 2006). A tax cut also positively affects demand by increasing disposable income for the consumers. Keynes maintained that the correct fiscal policy to be followed by the government when faced with high unemployment is to run a deficit in the budget. The thought that budget deficit is bad, was changed during Keynesian era. The End of Golden Age During the ...Download file to see next pagesRead More
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