KEYNES THEORIES OF

DEFICIT SPENDING
P R E S E N T A T I O N

NEETHU R MENON
ZULFA ABDULLA
KARTHIK NARAYANAN P
ECONOMIC THEORY
Economic theory is a systematic framework of concepts, principles, and models that
economists use to analyze and understand the behavior of individuals, businesses, and entire
economies.

Importance of Economic Theory:

Policy Formulation
Resource Allocation
Market Behaviour
Wealth and Income Distribution
Innovation and Growth

Important Theories:
Classical Economics
Keynesian Economics
 CLASSICAL VS. KEYNESIAN ECONOMICS

BASIS CLASSICAL ECONOMICS KEYNESIAN ECONOMICS

Free markets, would naturally reach a state of Markets could experience prolonged periods of high
Views on Market equilibrium, with full employment and optimal unemployment and stagnation due to insufficient
resource allocation aggregate demand

Role of Limited government involvement in the Active role of government in managing the
Government economy economy, particularly during economic downturns

Long-term focus, emphasizing the importance

Long-Term vs. Addressed short-run economic issues, particularly
of factors like capital accumulation, technology,
Short-Term during periods of economic crisis
and productivity growth in determining an
Focus
economy's prosperity.

Supports government intervention through fiscal

Suggests that government should have a
Policy policies (e.g., increased government spending during
laissez-faire approach, intervening in the
Implications recessions) and monetary policies (e.g., adjusting
economy as little as possible
interest rates)
JOHN MAYNARD KEYNES
Born on June 5, 1883, in Cambridge, England
Son of economist John Neville Keynes
Education at Eton College and King's College, Cambridge
He worked at the India Office and the Treasury, gaining valuable
practical experience in government finance
Most influential work, "The General Theory of Employment, Interest,
and Money," was published in 1936 during the midst of the Great
Depression
Challenged classical economic theories and advocated for government
intervention in economic management
Influential figure in international monetary negotiations post-World
War II
Shaped the Bretton Woods system, establishing IMF and World Bank
Passed away on April 21, 1946
 WORKS OF KEYNES
The Economic Consequences of the A Tract on Monetary Reform (1923):
Peace (1919): Keynes explored monetary economics and
In this work, Keynes criticized the Treaty of
introduced the concept of "liquidity preference,"
Versailles and its punitive terms imposed on
explaining how individuals hold money for various
Germany after World War I. He accurately predicted
purposes. This laid the foundation for his later
that these terms would lead to economic and
work on interest rates and monetary policy.
political instability.

The Bretton Woods

How to Pay for the War (1940): Conference(1944):
The General Theory of Employment, Interest,
Keynes outlined his thoughts on Keynes played a pivotal role in
and Money (1936):
Perhaps Keynes' most influential work, it challenged financing World War II, proposing designing the post-World War II
classical economics by proposing that market economies temporary deficit spending financed by international monetary system.
could experience prolonged unemployment. He introduced post-war taxation. This influenced The conference established the
the concept of "aggregate demand" and advocated for wartime economic policies in the UK IMF and the World Bank and
government intervention through fiscal and monetary and the US. established rules for fixed
policies to manage economic fluctuations, revolutionizing exchange rates, shaping the global
macroeconomics. monetary system until the early
1970s.
SMALL
HISTORY
LESSON
The
Great
Depression
 ECONOMY AGRICULTURE
01 BLOOM 05 LACK
OCT 24TH 1929

BLACK 02 TAX &

SPENDING 06 LIQUIDATION/
BANRUPTCY
THURSDAY AUTOMOBILE/ BANKS
03 RADIO 07 COLLAPSE

04 STOCK
MARKET 08 INDUSTRY
SHUTDOWN
 KEYNES’ KEY POLICY

AGGREGATE MULTIPLIER GOVERNMENT

DEMAND EFFECT INTERVENTION
 AGGREGATE DEMAND
Aggregate Demand - Total demand for final goods and services in a economy at a given
time and price level.
Aggregate demand plays a crucial role in determining the level of economic output or
Gross Domestic Product (GDP).
Components:
1. Consumption (C): Consumer spending on goods and services.
2. Investment (I): Business investment in capital goods, such as machinery and factories.
3. Government Spending (G): Government expenditures on goods, services, and public
projects.
4. Net Exports (NX): The difference between exports and imports .

AD = C + I + G + NX
ROLE OF AGGREGATE DEMAND IN KEYNESIAN
THEORY
Keynesian economics places a strong emphasis on managing aggregate demand to achieve economic

stability and full employment.

Demand-Determined Output: Keynesians argue that in the short run, the level of economic output

and employment is primarily determined by the level of aggregate demand.

The theory believes that "demand creates its own supply" rather than the Classical claim of "supply

creates its own demand".

Multiplier Effect: Keynesians emphasize the multiplier effect, which means that changes in spending

can have a magnified impact on income and output. This underscores the importance of government

intervention to boost AD during economic downturns.

Government Intervention: Keynesian economics advocates for government intervention, especially

during times of recession or high unemployment.

Stabilizing the Economy: The ultimate goal of managing aggregate demand in Keynesian theory is to

stabilize the economy.

MULTIPLIER CONCEPT
Supports the idea that government spending or other forms of autonomous spending can

have a substantial impact on economic growth and employment.

Initial Change in Spending: The multiplier concept starts with an initial change in

spending, often triggered by government spending.

Increase in Income: When the government increases its spending on, say, infrastructure

projects, it directly increases the income of workers involved.

Induced Changes in Spending: These individuals who received additional income are likely

to spend a portion of it on various goods and services.

Multiplier Effect: The workers now contribute to increased demand by spending the extra

money. This leads to further rounds of increased income and spending as the initial

injection of money continues to circulate through the economy.

IMPORTANCE OF MULTIPLIER CONCEPT

Understanding Economic Impact: Helps to understand the broader economic impact of changes in
spending.
Effective Economic Stabilization: During economic downturns, such as recessions or periods of low
economic activity, the multiplier concept underscores the effectiveness of government intervention
through fiscal policy.
Job Creation: The multiplier concept supports the idea that government spending can lead to job creation.
Evaluating Economic Policies: The multiplier concept provides a framework for evaluating the effectiveness
of various economic policies.
Supporting Underutilized Resources: When an economy is operating below its full potential, with
underutilized resources such as idle factories and unemployed workers, the multiplier concept supports the
efficient use of these resources.
 DEFICIT SPENDING
Deficit spending refers to a situation in which a government,
typically at the federal level, spends more money than it
collects in revenue during a specific fiscal period, such as a
year.

REVENUE REVENUE REVENUE

Exceeds Equals Less than

EXPENDITURE EXPENDITURE EXPENDITURE

SURPLUS BALANCED DEFICIT

 DEFICIT SPENDING AS A TOOL
IN KEYNESIAN ECONOMY

Keynesian economics suggests that deficit spending can be a useful tool for
the government to stimulate economic activity. By deliberately running
budget deficits (spending more than it collects in taxes) during economic
downturns, the government can inject money into the economy, create jobs,
and increase consumer and business confidence. This, in turn, is expected to
jumpstart economic growth.
DEFICIT SPENDING IN COUNTER CYCLICAL POLICY
A counter-cyclical fiscal policy refers to
strategy by the government to counter boom
or recession through fiscal measures.

It works against the ongoing boom or

recession trend; thus, trying to stabilize the
economy.

Taxes Taxes

Expenditure Expenditure
ARGUMENTS AGAINST DEFICIT SPENDING

INCREASED NATIONAL DEBT

INTEREST COSTS

INFLATION CONCERNS

CROWDING OUT PRIVATE INVESTMENT

GENERATIONAL BURDEN

DEPENDENCE ON GOVERNMENT INTERVENTION

POLITICAL CONSIDERATIONS
 Fiat Monetary System

COMMODITY
COMMODITY MONEY BACKED MONEY FIAT MONEY

Backed by commodity It shall be. Value

Barter System
in treasury declared by government
 DEFICIT SPENDING AND INFLATION

Deficit Spending

Fiat Money Creation

Inflationary Pressure
Countries with highest deficit in 2022
USA
Coronavirus Aid, Relief, and Economic Security (CARES) Act, along with
subsequent stimulus packages, authorized trillions of dollars in government
spending.

UNITED KINGDOM
UK government implemented deficit spending measures, including the
Coronavirus Job Retention Scheme (commonly known as the furlough scheme)
to support workers and businesses during lockdowns. Additionally, there were
initiatives to bolster the National Health Service (NHS) and provide financial
assistance to individuals affected by the pandemic.

INDIA
Strengthen its healthcare infrastructure, setting up COVID-19 testing and
treatment facilities, increasing hospital bed capacity, procuring medical
equipment and supplies, and enhancing healthcare personnel training.
"Pradhan Mantri Garib Kalyan Yojana (PMGKY)" to provide direct cash
transfers to vulnerable populations.
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)
Vaccine Procurement and Distribution
Venezuela: Excessive deficit spending, combined with economic mismanagement
and falling oil prices, led to hyperinflation and economic collapse in Venezuela.
The country's currency became virtually worthless, and essential goods became
scarce.

Zimbabwe: Zimbabwe experienced hyperinflation and severe economic

challenges due to deficit spending and the printing of excessive amounts of
money. This led to a loss of confidence in the currency, widespread poverty,
and economic instability.

Greece: Greece faced a fiscal crisis in the early 2010s, partly due to persistent
budget deficits. The country's debt-to-GDP ratio became unsustainable, leading
to austerity measures and economic turmoil.

Argentina: Argentina has a history of fiscal deficits and debt crises. High
inflation and currency devaluation have been recurring issues, with deficit
spending contributing to economic instability.
 NATIONAL
SECURITY

PUBLIC
HEALTH DISASTER
AND RECOVERY
PANDEMIC
RESPONSE

APPLICATIONS
OF DEFIICIT
SPENDING
INFRASTRUCTURE RESEARCH
INVESTMENT AND
INNOVATION

SOCIAL GREEN
SAFETY INITIATIVES
BACK TO
HISTORY
CLASS
The
New
Deal
THE 3 R’s
1932 ELECTIONS

RELIEF 1933- 1938 - 5 YEARS OF

PROGRAMS AND POLICIES

RECOVERY FIRST NEW DEAL - 1933

ECONOMY RESTRUCTURE

REFORM SECOND NEW DEAL -1935

RESOURCE ALLOCATION

FRANKLIN DELANO FUTURE

ROOSEVELT
 PROGRAMS AND
POLICIES

WPA CCC SSA FDIC FCIC

Works Progress Civilian Social security Federal Deposit Federal Crop
Administration Conservation Act Insurance Insurance
Corps. Corporation Corporation
Thank You
For Your Attention