Answer to Question #313177 in Macroeconomics for captain nyagah

Question

Discuss an application of the Keynesian theory of business cycles and macroeconomics stabilization.

Answer 1

What distinguishes Keynesians from other economists is their belief in active policy for decrease in the amplitude of the business cycle that they among the most important of all economic tasks.

Instead of seeing unbalanced government budgets as wrong, Keynes advocated a so-called counter-cyclical fiscal policy that works in the opposite direction of the business cycle. For example, Keynesian economists to support deficit-financed spending on labour-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns. In times of strong growth in demand, they would rather raise taxes to cool the economy and prevent inflation. Monetary policy can also be used to stimulate the economy, for example by lowering interest rates to encourage investment. Exception occurs during trap liquidity, when the growth of the money supply cannot lead to lower interest rates and, as a result, does not stimulate production and employment.

Keynes argued that governments should deal with problems in the short term rather than waiting for market forces to fix things in the long term because, as he wrote, "in the long run we all die". This does not mean that the Keynesians are for policy adjustments every few months to maintain full employment in the economy. In fact, they believe that governments cannot have enough information to successfully provide accurate information setting.