Transcript 24--Keynesian Economics ppt

What is
Keynesian
Economics?
A business cycle
In a normal
business cycle,
periods of
expansion
(prosperity) are
followed by periods
of contraction
(recession).
Large expansions
are called “booms”
and large
contractions are
“depressions”.
A prosperity cycle
When things are going
well, all parts of the
economy improve.
People spend money,
companies hire more
workers and build new
factories, wages are on
the rise, and
unemployment is low.
Governments collect so
much in taxes, they
lower the rate of the
tax, making the spiral
go up more.
A recession cycle
When the economic
boom slows or stops, it
affects the entire
economy.
People stop spending
as much as usual and
start saving their money,
increasing the amount
of unsold goods, forcing
companies to lower
prices and/or lay off
workers.
With less tax money
coming in to
government, they
usually raise the tax rate
The “old” Adam Smith
Business cycles are a normal part of
model
capitalism.
They work themselves out on their own.
They can be healthy for businesses as weak
companies and bad products fail.
Some business cycles are shallow (expansion
then recession) and some are large (boom
then depression).
Government should not help out people who
are suffering in down times, after all, “The
business of America is business”, according to
President Coolidge.
The Keynesian model
Normally, the economy functions fine by itself; people
earn and save in a fairly regular pattern.
If the economy is growing too fast and people are
spending too much money, the government should
do something to discourage people from spending so
much.
But, if something bad happens to enough people,
then people stop spending and start to save more.
The government should step in and help the
economy recover by encouraging people to spend
money again.
How does the government do this?
1) Manipulating the
supply and cost of
money.
Our government is constantly monitoring many
economic factors and changing the supply of
available money.
The government uses two tools: spending and
interest rates.
By changing these two things, the government can
drastically change the business cycles.
1) Manipulating the
supply and cost of
money.
This chart
shows four
different types
of money.
“M1” is the
most
important--it is
the total
amount of
ready cash
held in banks
plus all money
held in
checking and
savings
1) Manipulating the
supply and cost of
money.
When the
economy is
growing too
quickly, the
Federal Reserve
Banks restrict
how much
money they lend
out.
The US Treasury
also makes
Savings Bonds
available at
higher interest
1) Manipulating the
supply and cost of
money.
When the
economy is
growing slowly,
the Federal
Reserve Banks
make more
money available
to lenders.
The US Treasury
also lowers the
interest rate paid
on Savings
Bonds, making
people choose to
invest money
1) Manipulating the
supply and cost of
money.
The Federal Reserve
Banks can also make
money more
expensive or less
expensive by
changing the “prime
rate”, the rate they
charge large banks to
borrow money.
If the economy needs
a boost, the “Fed”
lowers rates which
usually means loans
& mortgage rates go
down so people
2) Government
spending
The second
method involves
government
spending.
When the
economy is
sluggish, the
government can
spend more
money, creating
demand for
products and
giving people
jobs.
This is called
2) Government
spending
When spending
increases, the
government
initially loses
money, but the
positive effect on
jobs and
consumer
confidence brings
higher
employment and
more income
through taxes.
This is called
“pump-priming” or
“jump-starting”
What this means
The government is no longer just
an observer of the economy, it is
now a major player.
Government spending and
federal money policy can shorten
periods of economic recession
as well as slow down periods of
unhealthy growth.
So, if there is a recession or
depression, the government can
spend lots of money, lower
interest rates, and get the
economy moving in an upward
spiral.
End