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John Maynard Keynes Keynesian economics Abdul Ruhulla Financial University under the Government of the Russian Federation (1883-1946)

John Maynard Keynes. Keynesian economics

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Page 1: John Maynard Keynes. Keynesian economics

John Maynard Keynes Keynesian economics

Abdul Ruhulla

Financial University under the Government of the Russian Federation

(1883-1946)

Page 2: John Maynard Keynes. Keynesian economics

The Early J. M. Keynes Born in 1883 in Cambridge, England Son of John Neville Keynes

Neville was a professor of Economics and Logic at Cambridge Univ., and wrote on Economic Methodology

Won a scholarship to Eton Boy Genius

Won prizes for his work in the classics, mathematics, history, English essays

Wrote papers on contemporary social problems, participated in crew and debate, acted, read everything

Became an expert in medieval latin poetry Part of Eton’s social elite Won a scholarship to King’s College, Cambridge

Page 3: John Maynard Keynes. Keynesian economics

Keynes as a College Student President of the Student Union President of the University Liberal Club Rowed, studied philosophy, played bridge, visited

art galleries, collected rare books, went to the theatre

Became a member of the “Apostles”, a secret and highly exclusive Cambridge intellectual society

Became a member of the literary set called “the Bloomsbury Group.”

Page 4: John Maynard Keynes. Keynesian economics

Keynes After College Studied economics for perhaps 1 year, but did poorly

on his exams. Took a civil service exam and took a job at the India

Office for 2 years. 1908, his father managed to get him a job as a

lecturer at King’s College. Later he became a Fellow. 1911, he became editor of the Economic Journal. Worked at the Treasury during WWI. 1921, he published A Treatise on Probability. This was

his dissertation. It won him a fellowship at King’s College, Cambridge.

Marries Lydia Lopokova.

Page 5: John Maynard Keynes. Keynesian economics

Keynes, Inter-war Years Keynes wrote the Economic Consequences of the Peace

(1919), regarding reparation payments Best Seller Made him a public celebrity

1923, Tract on Monetary Reform (against returning to the pre-war gold standard)

Economic Consequences of Mr. Churchill (1925, warned of depression)

1930, Treatise On Money Makes millions in the stock market, commodity, and forex

markets. 1936, General Theory of Employment, Interest and Money 1937, he has a serious heart attack Died in 1946

Page 6: John Maynard Keynes. Keynesian economics

Keynesian EconomicsThe main ideas

Page 7: John Maynard Keynes. Keynesian economics

Keynesian Economics Based on the idea of the need for

state regulation of the economy. No more self-adjustments

For the prosperity of the economy: All have to spend as much money

as possible; The state should stimulate

aggregate demand growth even by the budget deficit, debt and unsecured issue of money.

Page 8: John Maynard Keynes. Keynesian economics

Laissez-faire

Page 9: John Maynard Keynes. Keynesian economics

Business cycle During Great Depression

He outlined the limitations of Microeconomics theory. Due to unemployment and poverty, the demand for good and services dropped. Many workers were unwilling to accept lower wages.

Page 10: John Maynard Keynes. Keynesian economics

Keynesian Economics Impact Aid in the formation of the 20th Century’s economy Consequences of the Great Depression were lessened Government took an active role in the country's economy (Departure

from neoclassical theories)

Page 11: John Maynard Keynes. Keynesian economics
Page 12: John Maynard Keynes. Keynesian economics

Intro to Macroeconomic Theory High unemployment rate greatly influenced

the development of macroeconomics Challenged the established neoclassical

economics Introduced important concepts such as:

Consumption Multiplier Marginal efficiency of capital Liquidity preference

Government's responsibility is to Reach and maintain full employment Regulate markets and free trade

END OFNEOCLASSICAL

THEORIES!such as Laissez-faire

Page 13: John Maynard Keynes. Keynesian economics

Debates Over Aggregate SupplyClassical Theory vs. Keynesian Theory

13

Page 14: John Maynard Keynes. Keynesian economics

Three Ranges of Aggregate Supply1. Keynesian Range - Horizontal at low output2. Intermediate Range - Upward sloping3. Classical Range - Vertical at Physical Capacity

Price level

Real domestic output, GDP

AS

Qf14

Keynesian Range

IntermediateRange

ClassicalRange

Page 15: John Maynard Keynes. Keynesian economics

Consumption Function

C0

Yd

C

c = mpc = C/Yd = marginal propensity to consumeC

Yd

C = C0 + mpc x YdM = 1/(1-mpc)

C = Consumer spendingA = Autonomous consumptionYD = Real disposable income

M - multiplier

Shows the relationship between real disposable income and consumer spending, the latter variable being what Keynes considered the most important determinant of short-term demand in an economy.

Page 16: John Maynard Keynes. Keynesian economics

d

Plannedexpenditureexceeds real GDP

Real GDP (trillions of 1992 dollars per year)

Agg

rega

te p

lann

ed e

xpen

ditu

re(tr

illio

ns o

f 199

2 do

llars

/yea

r)

4.0

6.0

8.0

10.0

0 2 4 6 8 10

a

b c

e

f

Real GDP exceedsplanned expenditure

45o line

Equilibriumexpenditure

IG

C0

Total ExpenditureC+I+G

Income-Expenditure modelExplains fluctuations in production of goods and services and spending. The model basically states that we produce as many goods as will sell on the market and fluctuations in production and expenditure are tied to keep an economy stable.

Page 17: John Maynard Keynes. Keynesian economics

The General Theory

Microeconomics and macroeconomics do not operate on the same basis. One cannot assume that what is true for the economic agent at the level of the individual consumer or firm is true in aggregate. This amounts to the fallacy of composition.

In microeconomics, relative price effects dominate. This is not true in macroeconomics. In macroeconomics, income effects dominate, making income more important in determining aggregate economic behavior.

Page 18: John Maynard Keynes. Keynesian economics

The General Theory

Therefore, consumption depends primarily upon income, not interest rates.

C C(r), but rather C = C(Y) “People don’t change their standard of living simply

because the interest rate changes a few points.”

Page 19: John Maynard Keynes. Keynesian economics

The General Theory

Money plays a key role in the economy. The use of money leads to uncertainty, and makes “piercing the veil” impossible. A money economy is fundamentally different from a barter economy. The classical dichotomy cannot hold.

Interest rates are established in the money market. People may rationally hoard money, holding money

for purposes other then making transactions.Equilibrium is not AD = AS. It is a state that persists.

Page 20: John Maynard Keynes. Keynesian economics

Why did the Keynesian theory didn't work? Government spend too much money

on post-WWII events. (Examples: Vietnam war, sending the first man to the moon)

The Keynesian solution stopped working

Unemployment became worst It created Inflation In conclusion Keynesian theories

work best on economics catastrophes

Page 21: John Maynard Keynes. Keynesian economics

Thank you for attention