Keynesianism and the Phillips Curve

What did Keynes argue the great depression was caused by?

A sharp decline in consumer demand caused by unemployment.

What was Keynsianism’s primary concern?

Employment

What did employees do in reaction to lay offs?

Stopped spending money→ caused more unemployment due to less consumer demand→ Fear caused a vicious cycle.

How did Keynes say depressions should be prevented?

1. Maintaining full employment- government support if needed

2. Provide social safety needs→ less likely of employees to cut spending in an economic down turn.

3. Engage in counter-cyclical spending- increase spending during down turn and make up for it during up turn- in a deficit if needed.

• Fiscal Policy

What was the Post-War Economic Order based on?

Keynesianism.

What did Embedded liberalism provide?

• Domestic protected and regulation of national economy

• Free trade between international economy.

What does the World Bank established to do?

Concessional loans to finance development projects after the war- mission expanded to loans to finance development in Global South.

What was the IMF established for?

Provide member states with short term loans and maintain liquidity in the global economy.

What was estbalished in 1947?

GATT

What did GATT do?

• through rounds of trade talks- reduced trade barriers.

What were currencies pegged against during embedded liberalism (post war)?

Currencies pegged against US Dollar- not subject to vast variation and prevented competitive devaluation. Made currencies more stable.

What prevented balance of payments problems?

Establishment of IMF

What was the keynsian model rooted in?

The Phillips Curve

What is the Phillips Curve?

Highlights trade off between unemployment and inflation.

What happens when inflation is high on money?

Purchasing power is lowered.

What is the consequence of high inflation?

• discourages savings

• Hoarding of commodities.

• Makes cash useless.

What does unemployment figures tend to overlook?

The extent of people actually employed- eg people who only have part time job, or people who have given up looking for a job, excludes students. Unemployment doubles when these measures are acounted for.

What is the dual mandate of the Federal Reserve?

Keep inflation and unemployment low

What are the tools of the federal bank?

Set bank rate (rate of interest charged by federal reserve to banks to borrow from it) and federal funds rate (affects interest rates on other forms of credit- eg houses etc). BY reducing rate→ cheaper for banks to borrow money→ cheaper for people to borrow money.

What does the fed require for banks?

Banks must retain a certain deposit of their cash and can loan the rest out.

What does the Phillips Curve conclude about Keynsian economics ?

It was succesful- unemployment decreased and so did inflation.

Why did the Phillips model break down in 1970s?

Unemployment and Inflation began to rise at the same time. (Stagflation)