If you want to learn about the modern world of economics, one branch that may interest you is the study of Keynesian economics. Known as “thesis” theory by its practitioners, Keynesian economics attempt to study the interaction of money, government, and economic activity in the process of producing overall economic output. Contrary to mainstream theories, this particular branch of modern economics suggests that monetary policy can actually have a significant effect on overall economic activity. In this short article, we'll take a look at some of the ideas behind Keynesian economics.
First, Keynesian economics differ from traditional economics in several ways. Unlike mainstream theories, Keynesian economics aren't driven primarily by an aim to identify how money can impact the production process. Instead, Keynesian economics are many different macroeconomic situations concerning how overall economic output is affected by aggregate demand. In the classical view, aggregate supply doesn't always equal the real productive capacity of the entire economy. Instead, it's affected by a host of variables.
Classical economists assume that price level shocks can cause enough widespread damage to the economy to affect overall demand, causing a recession. Keynesians disagree, believing that changes in aggregate demand due to changes in aggregate supply aren't enough to bring about a recession. For them, the problem must be caused by changes in investment decisions. In doing so, they believe that changes in investment (and their effect on output), interest rates, and other factors, will ultimately lead to a change in the level of employment and consumer spending.
Keynesians believe that the changes in investment decisions are caused by changes in the level of elasticity of investment, which they refer to as the business cycle's “equity-price curve.” This curve shows the fluctuations in investment that are associated with changes in overall demand, and changes in prices. When investment is high, prices are high; when investment is low, prices are low. The business cycle then changes in response to changes in both the level of overall demand and the level of investment, causing the curves to slope upwards (with equilibrium) or downwards (with recession).
As Albert Einstein once asked, “What does the future have in store for us?” It seems that the days of purely technical analysis of investment possibilities are over in the developed world. Instead, we now rely on observations of real economies over time to form a detailed picture of investment choices and their effects on output and inflation. Economic textbooks that treat the business cycle solely from a static perspective are now being challenged by developments in the field of econometrics, especially those written by Robert McKenzie and Charles Kindleberger.
The present period is one of considerable change both in the level of output and in the level of investment. The rapid rise of China and India as well as the recent economic slowdown in Europe has been reflected in global rates of demand and in relative prices of inputs. While an investment may be difficult to forecast, it can be measured on a regular basis and thus may provide a useful guide to investment decisions. An analysis of demand elasticity can also be used to give a more accurate picture of the state of investment demand in the business cycle.
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