Lesson Title : Keynesian (Fiscal) Economics

Lesson objectives:
1. To develop understanding of Keynesian economics;
2. To differentiate fiscal policies in Keynesian economics; and
3. To discover how Keynesian economics solved the great depression in the 1930s.

Pre-test
Identification: Identify what is being described in each item.
1. It is a macroeconomic theory of total spending in the economy and its effects on
output, employment, and inflation.
2.. He is best known as the founder of Kenyesian economics and the father of modern
macroeconomics.
3.. In Keynesian economics, government spending and consumer spending are
____________ in a recession.
4. It is the use of government spending and tax policies to influence economic
conditions including aggregate demand for goods and services, employment, inflation,
and economic growth.
5. It is one of which President Franklin Roosevelt campaigned, focusing on Keynesian
principles.

Concepts and Examples

LO1 : Understanding Keynesian economics

It is a macroeconomic theory of total spending in the

economy and its effects on output, employment, and
inflation, developed during the 1930s in an attempt to
understand the Great Depression. It is sometimes
referred to as “depression economics,” as Keynes’
General Theory was written during a time of deep depression—not only in his native
United Kingdom, but worldwide.
 John Maynard Keynes (1883–1946) was a British
economist. He is best known as the "Founder of Keynesian
Economics" and the "Father of Modern Macroeconomics",
the study of how economies—markets and other systems
that operate on a large scale—behave.

How do Keynesian economics work?

● In a recession, the government could :
1. Increase government spending
- How? Spend more
2. Increase consumer spending
- How? Lowering taxes

LO2: Differentiate fiscal policies in Keynesian economics

What is Fiscal Policy?
The use of government spending and tax policies to influence economic conditions
including aggregate demand for goods and services, employment, inflation, and
economic growth.

Types of Fiscal Policy

● Expansionary Policy - characterized by deficit spending, when government
expenditures exceed receipts from taxes and other sources. It is designed to
counteract the effect of recession.

WE NEED OUR ECONOMY TO EXPAND WHEN :

1. rGDP is below our potential
2. Unemployment rate is high
3. Experiencing recession
Expansionary Fiscal Policy Actions
1. Decrease Taxes;
2. Increase government spending; or
3. Both

Results
1. Fixes recessionary gap
2. rGDP has increased to potential
3. Unemployment rate has lowered
4. Price levels have increased

RESULT :
AD curve shifts RIGHT

● Contractionary Policy - characterized by budget surpluses. It is designed to

counteract the effect of inflation.

WE NEED OUR ECONOMY TO CONTRACT WHEN :

1. rGDP (Y) is above our potential
2. Prices are rising too fast
3. Experiencing rapid expansion

Contractionary Fiscal Policy Actions

1. Increase taxes;
2. Decrease government spending; or
3. Both
Results
1. Fixes expansionary gap
2. rGDP has decreased to potential
3. Unemployment rate back to natural rate

RESULT :
AD curve shifts LEFT

3 TENETS IN KEYNESIAN ECONOMICS

● Aggregate demand is influenced by many economic decisions—public and
private.
● Prices, and especially wages, respond slowly to changes in supply and demand,
resulting in periodic shortages and surpluses, especially of labor.
● Changes in aggregate demand, whether anticipated or unanticipated, have their
greatest short-run effect on real output and employment, not on prices.

LO3 : Discovering how Keynesian economics solved the great depression in the
1930s
What is great depression?
The Great Depression was an economic shock that impacted most countries across
the world. It was a period of economic depression that became evident after a major fall
in stock prices in the United States which inspired Keynes to think differently about the
nature of the economy.
HOW KEYNESIAN ECONOMICS SOLVED THE GREAT DEPRESSION?
President Franklin Roosevelt, who won in the 1932 election, campaigned for what he
called "New Deal" and promised massive spending programs to pull people back to
work and get them spending their money again.

Agencies created to lessen the impact of depression in the community:

● National Recovery Administration (NRA): try to get business and labor
together, create better working conditions for people and higher wages and more
opportunities for employment.

● Works Progress Administration (WPA) : massive government spending plan

that provided 3 million jobs for unemployed workers. Puts people back to work
with these massive projects.

● Tennessee Valley Authority (TVA) : focused on building dams for development

of hydroelectric power.

To get out of recession, Keynesian economics suggests that the government should
spend money to get money flowing through the economy. However, if more money is
put in circulation, it leads inflation to a curve. That's why during boom times, taxes
should be increased to slow down inflation and create a buffer for future recession.

Post Test
Multiple Choice: Choose the correct answer for the following questions.
1.) Given are the agencies created to lessen the impact of depression. Which is
incorrect?
A. Tennessee Valley Authority
B. Works Progress Administration
C. National Recovery Administration
D. None of the above
2.) It is characterized by deficit spending, when government expenditures exceed
receipts from taxes and other sources. It is designed to counteract the effect of
recession.
A. Fiscal Policy
B. Contractionary Policy
C. Expansionary Policy
D. Keynesian Economics

3.) He won as president in the 1932 election, campaigning what he called the "New
Deal", which is focused on Keynesian principles.
A. Franklin Roosevelt
B. John Maynard Keynes
C. Herbert Hoover
D. None of the above

4.) It was an economic shock that impacted most countries around the world. It began in
August 1929, when a series of financial crises punctuated the contraction.
A. Inflation
B. Great Depression
C. Recession
D. Contraction

5.) A theory of total spending in the economy and its effects on output, employment, and
inflation, developed during the 1930s in an attempt to understand the Great Depression.
A. Big bang Theory
B. KeyAsian Economics
C. Keynesian Economics
D. All of the above
Summary of Concepts
Keynesian economics is a macroeconomic theory of total spending in the economy
and its effects on output, employment, and inflation developed by John Maynard
Keynes in an attempt to understand the Great Depression, an economic shock and a
period of economic depression that happened in the year 1929 - 1939. It works by
increasing spending or lowering taxes.
There are two (2) types of fiscal policy : (1) Expansionary Policy, and (2)
Contractionary Policy; characterized by deficit spending and budget surpluses
respectively, making the aggregate demand curve shift from left to right or otherwise.
President Franklin Roosevelt campaigned "New Deal" which uses Keynesian
principles and created the following agencies which saved the Great depression :
National Recovery Administration (NRA), Work Progress Administration (WPA),
and Tennessee Valley Authority (TVA).

Answer Key and Solutions to Pre-Test and Post Test

Pre-Test
1.) Keynesian Economics 2.) John Maynard Keynes 3.) Fiscal Policy 4.) Increased
5.) New Deal

Post Test
Answers:
1.) D 2.) C 3.) A 4.) B 5.) C

REFERENCES :
https://www.investopedia.com/terms/k/keynesianeconomics.asp
https://youtu.be/f3_QIalMh4o
https://youtube.com/watch?v=kFhoHRMVU2Y&feature=share