Keynesian Economic Model
Introduction - How the US came to use it in 2020?
During the Corona Virus pandemic, the government has been experiencing situations similar to The Great Depression. Situations such as high unemployment rates and the homeless percentage going up. Unemployment rates have been at an all-time high since 1933. People are becoming homeless as they cannot pay their rent, or are losing their vehicles since they cannot pay the monthly fee. For example, many fast-food chains had to lay people off and close down many locations during this pandemic. Subway for example had to do the very same. Since people were not driving around as much the gas prices fell to as low as 44 cents per gallon, which is very low compared to the national average of $2.17 per gallon. To combat this economic recession the government decided to implement the Keynesian Economic Model which helped pull the country out of economic recession and induce demand.
What is the Keynesian Economic Model?
The Keynesian economic model is a macroeconomic theory, this theory states that the total spending of a country reflects on its economy and employment. This is a demand-side theory that focuses on need as the primary force to boost economic growth. This economic model theory was created by Keynes, he supported the increased government spending and lower taxes to stimulate growth in the economy. This theory also implies that the government should control their spending in a rapidly growing economy, like the United States. This helps prevent inflation, which is caused by an increase in demand. Currently, we are going through a stage of inflation. Gas prices are high as $3.25, and prices of food items have also started to grow, this can be extremely detrimental to some people.
How was this theory implemented?
Some examples of when this theory was put in use in the United States were during the Great Depression in 1933 and the CoronaVirus Pandemic in 2020. The government during the pandemic decided to lower interest rates which made people take out more loans at the incentive of paying back a very minimal amount every month. The government also handed out relief packages such as the CARES act, emergency relief package, and the American Rescue Plan. These were packages that the government provided for the people in order to induce the growth of the economy. The Keynesian Theory acts as a jump start to the economy when it is going through a recession.
What are the two main things that Keynesian Economics is based on?
Before we talk about this we need to remember that the Keynesian Theory is NOT a theory that a country can use for extended periods of time. The first main thing that Keynesian Economics is based on is that - the total demand is more likely than the total supply to be the main cause of a recession or any other short-run economic event. Secondly, wages can fluctuate, thus during an economic downturn, it can lead to unemployment in many job fields.