John Maynard Keynes: Monetary Policy And Government Intervention

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According to the reading, John Maynard Keynes ' economic theory was a game changer in his time. Keynes believed that fiscal policy and government intervention was the key to a corrected and fully outputting economy. This was contrary to the contemporary beliefs of his era that the markets were self-correcting without any intervention. His perspective has not gone undebated. In the 1960s, economic theory shifted to a belief that monetary policy (instead of fiscal government policy) was the main ingredient to a stable and fully expanded and producing economy. What is Monetary Policy? According to, the difference between these 2 different strategies is that monetary policy involves changing the money lending interest rate in a society, and thus the amount of money available to the public. According to the monetary policy intervention model, higher interest rates, decreases money available and consumer spending. This lowers aggregate demand in the economy. Or vice versa, lower interest rates will stimulate the economy with higher spending, increasing demand. What is Fiscal Policy? On the other hand, fiscal policy involves changing tax rates and levels of government spending to influence aggregate demand for goods in the economy.Keynes ' model of government intervention focuses on government fiscal policy intervention. A decrease in taxes while increasing government spending means that there will be a larger government deficit, but demand will increase.
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