ECO 372 Week 2 Discussion Question 2
Why do Keynesian economists believe market forces do not automatically adjust for unemployment and inflation? What is their solution for stabilizing economic fluctuations? Why do they believe changes in government spending affect the economy differently than changes in income taxes?
Keynesian economics believed that in the short-term prices were practically fixed. As a result, the Keynesian multiplier model was of no use in the 1970's when inflation was rampant. Market forces cannot automatically adjust for inflation if the Keynesian model does not account for it. The multiplier model addressed output fluctuations, not price fluctuations. The model believed recessions would be more prevalent than a depression. Keynesian economists also believed that a reduction in output also led to increased unemployment. This was because less output led to less business revenue, which led to lay offs. Less people in the workforce led to less spending, which led to less business revenue, etc.
The economists believed that government spending stimulated the economy when necessary. The economy would need assistance to reach its potential income...