The idea of the Keynesian view of unemployment was that yes, maybe the economy will fix itself through the changes of prices and wages, however, the economy cannot wait that long for the economy to fix itself. Things are not good at slow economic growth because there are no jobs (unemployment), no money and no food, so in the long run it would be hard to sustain ourselves until the economy “bounces back”.
Keynesian comes up with a short-run solution to fix economic problems ‘now’ (unemployment).
The Keynesian theorist does not see the economy as an elevator. For example, the economy is at equilibrium in the economy (a “floor” on an elevator) and if demand is down, people aren’t spending, causing a recession. The elevator has gone to a lower floor, and instead of going back up; they stay there at a new “equilibrium”. The reason for this is that wages were “sticky”, they are not flexible, and so the economy is unable to bounce back on its own.
When demand for goods and services go down, the number for goods and services decrease. If a business is unable to sell as much, they won’t produce as much, so quantity produced goes down. When the quantity produced decreases, the business will not need as many workers, so they start to lay them off. This action will increase the unemployment rate. When unemployment rate goes up, income for the individual goes down so demand still remains low.
The solution to this problem is government intervention. We need the government to “prime the pump” in order to get consumers spending again.
Economy is unstable without government intervention; it will help smooth out the business cycle and promote economic growth.
Priming the pump refers to government spending through fiscal policies- If government spends it creates jobs. As the number of jobs created increase, people’s income increases. If people have more income, the demand for goods and services increase.
Through government spending it puts money in people’s pockets, which encourages people to spend. As they start buying goods and services, business make money, which mean they can hire more people. Since businesses hire more workers, they are able to pay their workers, which mean people can buy more goods and services. This action gets the economy rolling again.
Keynes did not believe in
Debt- spend money and gain debt in the bad years and pay it off in the goods years
Transfer payments- leads to one time spending (buy one product when you get the money). it will not create new jobs.
monetary policy- this should be the last resort. changing money and interest will not grow the economy immediately /directly affect the jobs.
Dr. Stephanie Powers, "Unemployment", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)
The idea of the Keynesian view of unemployment was that yes, maybe the economy will fix itself through the changes of prices and wages, however, the economy cannot wait that long for the economy to fix itself. Things are not good at slow economic growth because there are no jobs (unemployment), no money and no food, so in the long run it would be hard to sustain ourselves until the economy “bounces back”.
Keynesian comes up with a short-run solution to fix economic problems ‘now’ (unemployment).
The Keynesian theorist does not see the economy as an elevator. For example, the economy is at equilibrium in the economy (a “floor” on an elevator) and if demand is down, people aren’t spending, causing a recession. The elevator has gone to a lower floor, and instead of going back up; they stay there at a new “equilibrium”. The reason for this is that wages were “sticky”, they are not flexible, and so the economy is unable to bounce back on its own.
When demand for goods and services go down, the number for goods and services decrease. If a business is unable to sell as much, they won’t produce as much, so quantity produced goes down. When the quantity produced decreases, the business will not need as many workers, so they start to lay them off. This action will increase the unemployment rate. When unemployment rate goes up, income for the individual goes down so demand still remains low.
The solution to this problem is government intervention. We need the government to “prime the pump” in order to get consumers spending again.
Economy is unstable without government intervention; it will help smooth out the business cycle and promote economic growth.
Priming the pump refers to government spending through fiscal policies- If government spends it creates jobs. As the number of jobs created increase, people’s income increases. If people have more income, the demand for goods and services increase.
Through government spending it puts money in people’s pockets, which encourages people to spend. As they start buying goods and services, business make money, which mean they can hire more people. Since businesses hire more workers, they are able to pay their workers, which mean people can buy more goods and services. This action gets the economy rolling again.
Keynes did not believe in
- Debt- spend money and gain debt in the bad years and pay it off in the goods years
- Transfer payments- leads to one time spending (buy one product when you get the money). it will not create new jobs.
- monetary policy- this should be the last resort. changing money and interest will not grow the economy immediately /directly affect the jobs.
Dr. Stephanie Powers, "Unemployment", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)