relevance of keynesian theory to the current economic

8/13/2019 Relevance of Keynesian Theory to the Current Economic

1/15

RELEVANCE OF KEYNESIANTHEORY TO THE CURRENT

ECONOMIC CRISIS

By

M.B.Jithya,

Aadhavan Somappa.R,N.Siva krishna reddy,

M.Abdula Ansari,

Shringar Manjari Tiwari,

G.Kumar babu.


2/15

Contents

Keynesian theory,

Eurozone crisis,

Feasibility of Keynesian theory,

Relevance of Keynesian theory to crisis,

How to overcome crisis,

How it will effect India's economy,

Conclusion.


3/15

Theory of income & Employment

Keynes offered this theory in 1936 and explained in this theory

that employment depends upon the income.

If the standard of national income is higher then rate of

employment will also be higher.

On the other hand if the level of national income is lower then

the level of employment will also be lower.

The equilibrium level of income and employment will be that

where aggregate demand is equal to the aggregate supply.


4/15

Two components

Aggregate demand

Aggregate supply

According to Keynes full employment situation

is equal to AD=AS. This point is known aseffective demand.


5/15

CRITICISM

In the under developed countries there are so many other

factors which are responsible for unemployment, like over

population and lack of skill.

Perfect competition is not found in real world.

In the long run its chances of success are limited.

It is not applicable in socialistic economy.

This theory was produced by the depression of 1930 and it is

not applicable in ordinary economic condition.


6/15

EURO ZONE CRISIS

Euro zone is the economic and monetary union of mem

ber countires ofeurope who have adopted euro as their currency.

The countries who use euro as their currency come under Euro Zone.

The Euro Zone formed in late 90s.They had formed a European CentralBank.

When any country in Euro Zone needs infrastructure development it

will get funded as a debt by the european central bank in form ofgovernment bonds .

The idea that euro zone started was to develop weak countries likegreece to fund it with cheaper interest rates and develop the countryeconomically.


7/15

Contd

The PIIGS(Portugal, Italy, Ireland, Greece, Spain) whichare weak countries borrowed money from European CentralBank and spent it recklessly.

The fiscal agendas now they had trouble repaying theseloans. Now these countries became defaulters.

Due to this panic situation which alarmed investors , theyare now investing in safe options like government bonds.

Due to this the overall stocks collapsed in these countrieswhich had negative effect on both country as well as globalmarkets


8/15

Feasibility of Keynesian theory in

US Crisis

Integrated approach to Monetary measures

Application of Keynesian theory

Will US Succeed in Bailing out its Economy by

applying the Keynesian theory? Seeds of Recession in US

Need to Stop 'Leveraged' Spending

US bail out of Finance Companies Is it a Right Approach?

Direct approach of killing US Recession


9/15

Feasibility of Keynesian theory in

Indian Slowdown Fundamentally, India has not gone wrong on any major aspects. But,

the infrastructure spending continues to be lower side even till date.

The Keynesian approach is more useful in case of Indian economythan US economy where there is faltering on certain fundamental

factors which specifically needs a correction in initial phase.

On the other hand, Indian economy which is still largely deprivedfrom domestic infrastructure spending would specifically benefit onaccount of large government spending on infrastructures & industries

along with cut in tax rates.

which may disburse more liquidity in the hands of people and thusenabling higher spending & consumption phenomenon.


10/15

THE KEYNESIAN RATIONALE

Theoretical arguments of John Maynard Keynes in GLOBALCRISIS

The global financial crisis suggests that government intervention is

necessary

The market players cannot form correct perceptions about the

direction of the economy

At the core of his theory one can make notice of the uncertaintyabout the future .

Uncertainty is not only the main reason for the instability of the

economies but also hinders the recovery from economic crisis

The states should intervene through the expansion of fiscal policies

in order to maintain the appropriate effective demand in theeconomy.

This kind of socialization of investments could stabilize the

economy.


11/15

Contd

The states should also take the role of investors by creating variouscompromises and cooperation mechanisms between public and

private parties to ensure full employment

If the state does not take action to stabilize the total expenditure thatit is needed to stabilize the economy then the market economy

becomes unstable as investments are affected by the uncertain

expectations about future developments.

In good times, the states should maintain budget surpluses but during

financial turmoil should intervene to market economy by creating

deficits in order to give the necessary impetus for growth.


12/15

HOW TO OVERCOME

EUROZONE CRISIS

Countries affected must:

Grind down wages

Raise productivity Slash spending

Raise taxes

Transparent banking system Endure such austerity drives for many years


13/15

EFFECTS ON INDIA

Indias exports to Europe could witness aslump close to 10%.

Export driven sectors such as textiles and

software's are likely to bear the brunt. About 22-28% revenues of India's top tech

major come from Europe whose revenues will

definitely affect. Govt overall target of $200 billion for the

fiscal could be at stake


14/15

Conclusion

The US crisis led to global financial crisis,which further spread to Eurozone and causedEurozone crisis, as these countries were most

affected. Hence probably Keynesian theory could help

the countries to come out of crisis and itmentions the role of government.

Inthe long run we are all dead


15/15

relevance of keynesian theory to the current economic

Documents