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    Keynes Theory of Deficit Spending

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    dipu francy
    1) John Maynard Keynes developed the theory of deficit spending in the 1930s to support expansionary fiscal policy and boost economic growth during recessions. 2) The theory proposes that increased government spending and deficits stimulate aggregate demand and consumer spending, creating further increases in output and employment through a multiplier effect. 3) While deficit spending can help stimulate short-term growth, critics argue that excessive deficits over the long-run may threaten growth through higher taxes, inflation, and debt default.

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    Keynes Theory of Deficit Spending

    Uploaded by

    dipu francy
    96 views14 pages
    1) John Maynard Keynes developed the theory of deficit spending in the 1930s to support expansionary fiscal policy and boost economic growth during recessions. 2) The theory proposes that increased government spending and deficits stimulate aggregate demand and consumer spending, creating further increases in output and employment through a multiplier effect. 3) While deficit spending can help stimulate short-term growth, critics argue that excessive deficits over the long-run may threaten growth through higher taxes, inflation, and debt default.

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    critisism of keyens theories

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    1) John Maynard Keynes developed the theory of deficit spending in the 1930s to support expansionary fiscal policy and boost economic growth during recessions. 2) The theory proposes that increased government spending and deficits stimulate aggregate demand and consumer spending, creating further increases in output and employment through a multiplier effect. 3) While deficit spending can help stimulate short-term growth, critics argue that excessive deficits over the long-run may threaten growth through higher taxes, inflation, and debt default.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    96 views14 pages

    Keynes Theory of Deficit Spending

    Uploaded by

    dipu francy
    1) John Maynard Keynes developed the theory of deficit spending in the 1930s to support expansionary fiscal policy and boost economic growth during recessions. 2) The theory proposes that increased government spending and deficits stimulate aggregate demand and consumer spending, creating further increases in output and employment through a multiplier effect. 3) While deficit spending can help stimulate short-term growth, critics argue that excessive deficits over the long-run may threaten growth through higher taxes, inflation, and debt default.

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    of 14

    KEYNES THEORY OF DEFICIT

    SPENDING
    KEYNES THEORY
    • The British economist John Maynard Keynes developed this theory in
    the 1930s.
    • The government should increase demand to boost
    growth. Keynesians believe consumer demand is the primary driving
    force in an economy.
    • The theory supports expansionary fiscal policy.
    KENESIAN EFFECT
    • When the economy has high unemployment, an increase in government
    purchases creates a market for business output, creating income and
    encouraging increases in consumer spending, which creates further increases
    in the demand for business output.
    • The increased size of the market, due to government deficits, causes
    the accelerator effect which stimulates demand further and encourages rising
    employment. Increase in government payroll has been shown to depress the
    economy in the long run
    Principle tenets of Kenesianism
    • A Keynesian believes that aggregate demand is influenced by a host
    of economic decisions—both public and private—and sometimes
    behaves erratically
    • According to Keynesian theory, changes in aggregate demand,
    whether anticipated or unanticipated, have their greatest short-run
    effect on real output and employment, not on prices.
    • Keynesians believe that prices, and especially wages, respond slowly
    to changes in supply and demand, resulting in periodic shortages and
    surpluses, especially of labor.
    • Keynesians do not think that the typical level of unemployment is
    ideal—partly because unemployment is subject to the caprice of
    aggregate demand, and partly because they believe that prices adjust
    only gradually.
    • Keynesians’ belief in aggressive government action to stabilize the
    economy is based on value judgments and on the beliefs that
    (a) macroeconomic fluctuations significantly reduce economic
    well-being &
    (b) the government is knowledgeable and capable enough to
    improve on the FREE MARKET.
    What is deficit spending?
    • Deficit spending happens when a government's expenditures are
    higher than the revenues it collects during a fiscal period and thus
    causes or worsens a government debt balance.
    • Usually, government deficits are financed by the sale of public
    securities, especially government bonds.
    • A number of economists, especially those in the Keynesian tradition,
    believe government deficits can be used as a tool of stimulative fiscal
    policy
    Theory of deficit spending
    • Human tendencies are against the economy.
    • People are optimistic when the economy is healthy, so they spend
    without thinking.
    • People act conservatively when economy is in recession which
    worsens the economic conditions
    • Government investment is crucial in recession and the spending must
    be increased to stabilize the economy.
    Effects of Deficit Spending
    • Keynes felt the main role of deficit spending is to prevent or reverse
    rising unemployment during a recession
    • He also believed there was a second benefit of government spending,
    something know “the multiplier effect.” This theory suggests that $1
    dollar of government spending could increase total economic output
    by more than $1.
    • Many economists believe that the effects of deficit spending, if left
    unchecked, could threaten economic growth. Too much debt,
    augmented by consistent deficits, could cause a government to raise
    taxes, seek ways to increase inflation, and default on its debt
    MULTIPLIER EFFECT:SPENDING MULTIPLIER
    • The multiplier effect refers to the disproportionate rise in final income that
    results from an injection of spending. In other words, capital infusion,
    whether it be at the governmental or corporate level, should have a
    snowball effect on economic activity.
    • A new project increase in employment an increase in disposable
    income increased demand for goods and services increases the
    disposable income of the seller.
    • One's spending is another's income.
    • An initial change in government spending causes a ripple effect to the
    econonmy and this effect total economy.the size of the ripple depends on
    how much money people spend and save when they get income.This is
    called the marginal propensity to consume andthe marginal propensity to
    save.
    MULTIPLIER EFFECT:SPENDING MULTIPLIER

    Higher the MPS, larger is the


    multiplier effect.
    ADVANTAGES
    • It pushes growth in the economy.
    Since a government will have the needed funds, it can spend on infrastructure
    and create more employment in the labor force. And with more
    developments happening in a country, more investors will be attracted, thus
    opening up more jobs and increasing revenue and economic growth rate. This
    is greatly beneficial during a recession.
    • It forces the government to have more control on spending.
    Since the government needs to pay back the loan with high interest rates, it
    will be more careful when making investments and creating a budget. They
    need to make wise decisions when prioritizing projects and spending.
    • The crowding in effect
    Deficit spending through tax
    cuts or the purchase of goods
    and services by the
    government can stop the
    downward spiral and help to
    turn the economy back
    around. In addition, as the
    economy improves due to the
    deficit spending the outlook
    for businesses also improves,
    and this can lead to increased
    investment, an effect known
    as crowding in
    DISADVANTAGES
    • It can result to a bad economy.
    A country will typically have no savings during a deficit period since
    they must prioritize paying off the debt and interest. It would create
    problems during emergencies.Another adverse effect is the tendency
    of the government to hike up taxes which leads to inflation and a
    lower standard of living.
    • It reduces investments.
    The debt will greatly increase leading them further into a recession.
    As a result, they will have less money to spend on infrastructure and
    discourage investors from doing business in their country.
    • It can risk national
    sovereignty.
    Nations or financing
    institutions that lend money
    to a country in recession can
    make certain demands
    before approving a loan. For
    example, the government in
    debt may have to change its
    spending policies and laws. It
    may also have to sell off its
    land and other assets in
    order to pay off the debt.

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