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Keynes: (83-46) brit economist,
Ideas influenced by modern macroec./ K advocated interventionist government policy, using fiscal and monetary
Measures to mitigate the adverse effects of recessions and depressions./
Western economies adopted Keynes's ideas during and after WW2 speciallly 50-60/
70s Friedman and others challenged his thinking, but the crisis of 2007 has led
To a resurgence in Keynesian thought, and Keynesian economics provided a basis
For the policies of Obama and of Brown/ Keynes was proven correct when the
German economy suffered hyperinflation in 1923,when the Weimar Republic
Collapsed, and when WW2 broke out./ In post-WW1 Britain, unemployment was high.
Keynes advocated price stability./ Keynes also favoured Government spending on
public works as a response to unemployment./ Great Depression two works (Treatise
On money/ Means to Prosperity) , Keynes argued for counter-cyclical public
Spending/ these ideas were adopted in Germ, Swed and US after depression./ K
Published 36 (General Theory of employ, int, money) This challenged the
Neo-classical orthodoxy that free from government influence, markets would
Naturally establish a full employment equilibrium/ The General Theory argued
That demand, not supply, governs the overall level of economic activity. Demand
= Consumption + Investment./ Keynesians support ideas Phillips Curve, which
Predicted an inverse relationship between unemployment and inflation/ The
Response to the global financial crisis 2007-08 saw a return to robust
Government intervention – bank rescues, fiscal stimuli.Hayek
(99-92) Austr school econ/ influenced by Darwin (Survival of the Fittest)
market decide/ boom and bust cycle caused by government interference in free
Markt/ issue- central banks cutting inte rates to weak economies (H said this
Souldnt be touched)/ Peter Schiff argues that had that been the case pre the 07
Crisis (int rates would have been higher and damage econmy less)/ H microecon-
Economy consist of a myriad of small transactions/ economy is too complex to be
Understood- so interference by government is doomed to fail./ Bankruptcy is not
A problem - solution. It cleanses the free market of firms that shouldn’t be
There./ Vital to control inflation [a legacy of Hayek’s experiences of
Hyperinflat post WW1]./ You can’t continue with Government deficits financed by
Borrowing (debt) - argument supporting Austerity/ Financial crisis (who
Was right) Crisis caused by Free Market policies and Light Touch
Regulation/ Capitalism went crazy and caused the global meltdown/ Only solution
Is Government Stimulus – no other source of consumption / investment/
Governments must invest to rescue failing banks/companies, guarantee debts of
Troubled banks, launch debt-financed spending packages as a stimulus, and print
Money if necessary/ US Government post 9/11 set interest rates too low [1%] for
Too long and led to the borrowing / spending bubble./ Free Market would have
Set rates much higher./ Austerity is the way (ex. Medicine- it tastes bad but
The patient recovers quicker)