Keynesianism

The great depression of the 1930s demonstrated that, at least in the short run, the market system does not automatically lead to full employment. In the ^General Theory of Employment, Interest and Money" (1936), John Maynard Keynes argued that market forces could produce an equilibrium with high unemployment of indefinite duration. For example, if people are worried about the possibility of losing their jobs in the near future

INIT 10. BUSINESS CYCLE AND BUSINESS TRENDS

they will probably start (1) ______ money and consume less, which will lead to a fall in

demand, and consequently in production and employment. In such circumstances, producers will clearly not be interested in making new investments. So people's savings

will remain unused, and the economy will settle into a new (2)_________ at a lower level of

activity - with fewer goods being produced, fewer people employed, and reduced rates of income and investment. Classical economic theory stated that in the long run, excess

savings would cause (3)____ to fall and investment to increase again. Keynes disagreed,

arguing that market economies are inherently unstable and without a self-correcting mechanism, except perhaps in the long run - but as he famously put it, "in the long run, we are all dead'.'

Keynes therefore recommended governmental intervention in the economy, to

counter the business cycle. During an inflationary (4)________ governments could decrease

their spending or increase taxation. During a recession, on the contrary, they could

increase their expenditure, or decrease taxation, or increase the (5) ___________ and reduce

interest rates, so as to stimulate the economy and increase output, investment, consumption and employment. Keynes also argued that even a small amount of

additional government spending or an increase in private investment causes (6)_________ to

expand by an amount greater than itself, because of the multiplier effect: the new money is repeatedly re-spent, except for the proportion that people choose to save.