Why did Keynes believe that the proper response to a period of unemployment was for government to increase its spending?
How could this policy help to combat unemployment?
The correct answer and explanation is :
John Maynard Keynes, one of the most influential economists of the 20th century, argued that during periods of unemployment, especially in times of economic downturns, the government should increase its spending. This idea was a key part of his broader economic theory, known as Keynesian economics, which challenged the classical economic view that markets would always self-correct and return to full employment.
Keynes believed that the main cause of unemployment during a recession was insufficient aggregate demand, which is the total demand for goods and services within an economy. In times of economic downturn, businesses and consumers are often unwilling or unable to spend, leading to a decrease in demand for goods and services. This reduction in demand causes companies to cut back on production, leading to layoffs and a rise in unemployment.
To combat this, Keynes argued that the government could step in and increase its own spending to offset the shortfall in demand. Government spending could take the form of investments in infrastructure, public works, and other projects that would create jobs directly and stimulate the economy. As the government spends money, it would generate income for workers, who would then go on to spend that income on goods and services. This increased spending would boost demand and lead businesses to increase production and hire more workers, thus reducing unemployment.
In essence, Keynes advocated for the use of fiscal policy, where the government actively manages its spending and taxation to influence the economy. By increasing government spending, particularly when private sector demand is low, Keynes believed the economy could be restored to full employment and growth. This approach was especially important during the Great Depression, when unemployment levels were high, and market forces alone seemed insufficient to restore the economy to health.