DMPQ- What is the basic Premise of Keynesian economics?

Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression.

Keynesian Economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions. Thus it focuses on demand-side solutions to recessionary periods.

Lowering interest rates is one way governments can meaningfully intervene in economic systems, thereby generating active economic demand. Lowering interest rates, encourages borrowing and lending and short-term demand increases that reinvigorates the economic system and restore employment and demand for services.

Keynesian economists focus on lower interest rates as a solution to economic woes, but they generally try to avoid the zero-bound problem. As interest rates approach zero, stimulating the economy by lowering interest rates becomes less effective because it reduces the incentive to invest and the attempt at generating economic recovery may stall completely.

 

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