Economic Policies and Great Depression

Keynesian theory and economic policies

Term Paper, 2012
8 Pages, Grade: B



The Great Depression resulted to the need to reexamine the economic policies that were being used by various governments to control the economy. The use of market and private sector to control the economy without government intervention saw the increase in mass unemployment. Economic authorities considered adapting the various policies on monetary and fiscal to help regulate the issue. Economists like Keynes developed the Keynesian theory to help the government in correcting the great depression of 1930. Golden age of capitalism was a period of economic prosperity which happened towards the end of World War II in 1945 and lasted up to the 1970s (Wakeman, 2003). It was a period with high levels of employment rate and unprecedented economic trade. It was dominated by capitalism with free trade. It is also known as the post-world war II which in other ways can be regarded to as the postwar economic boom and the long boom or the age of the Keynes used to refer to the quarter century following the world war. This period ended with the collapse of the Bretton woods system in 1971, oil crisis 1973 and the stock market crash which occurred in 1974. The rise of monetarism school of thought with policies emphasizing the role of monetary aggregates in policy analysis including the distinction between nominal and real interest rates provided another view in regard to the Keynesian theory (Canterbery, 2011). This paper seeks to examine these key issues in the period of Great depression and thereafter.

Keynesian economic policies

The policies involved the total spending within the economy that is aggregate demand. It analyzed the effect of the aggregate demand on the output and inflation. The aggregate demand is believed to be affected by economic decisions which include fiscal and monetary. These are the government spending and taxation policies. The changes occurring in aggregate demand which could either be unanticipated or anticipated have a great impact in short-run on employment and real output. Monetary policies which people anticipate could produce effects in employment and on output when prices remained rigid and in so doing, Keynesian theory assumed and explain the theory in rigid wages (Harris, 2005). Assumption that when the prices are rigid, any resultant fluctuation in either investment consumption or government expenditure would result to fluctuation of the output. Keynesian argued that the government needed to control the economy by spending and if not so then the economy indefinitely would languish with very high unemployment. This would be because of the aggregate demand being inadequate. They argued that the market economy would never recover itself without the action of the government. During the depression of 1930, Keynes determined that use of monetary policy by the government through reduction of interest rates which during this period were close to zero would never solve the problem (King, 2002). However, his argument indicated that with increased government spending, then demand will be boosted directly and at the same time increase the demand of both suppliers and workers whose income would have been increased through the government spending. Most important was the ability to cut the tax so as to be able to place disposable income in the wallets of the consumers which in turn would boost demand. By this, he resolved that the use of an appropriate fiscal policy by the government at the time of high unemployment would help resolve most of the problems associated with it. The appropriate fiscal policy therefore was to cut budget deficit. Keynesians had various views regarding these elements. According to the Keynesians there is little presumption that the market outcomes are in any way desirable leaving a much greater deal for the government intervention to correct the economic problems. They also considered that changes in the supply side of the market are vital to control the market economy. Most importantly has been the view that both fiscal and monetary authorities are in a better position to control conditions of demand for particular products and at the same time control demand conditions for the whole economy (Holt & Pressman, 2007).

Keynesian economic policies have promoted a mixed economy where the private sector and the state play a crucial role. Upon its acceptance, it marked the elimination of the Laissez-faire economic which largely based private sector and the market were in a position to operate on their own efficiently without government intervention. They therefore concluded that there was no possibility or a strong automatic tendency upon which employment and even output would be able to move towards levels of full employment. The collapse of the economy in the so called Great Depression was viewed by Keynes as a lost incentive in production where the resultant mass employment had been caused rigid and high real wages. However, they proposed that the only way to control the problem was to cut wages. This would however reduce consumer demand and dropping of aggregate demand, reduction in revenue and even the profits. Therefore insufficient purchasing power by the consumers caused the Great depression (Hunt, 2003)


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Economic Policies and Great Depression
Keynesian theory and economic policies
King`s College London
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economic, policies, great, depression, keynesian
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Kelvin Molly (Author), 2012, Economic Policies and Great Depression, Munich, GRIN Verlag,


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