Definition
Keynesian Economics
Keynesian economics argues that aggregate demand drives output and employment, and that governments should use fiscal and monetary policy to stabilise the economy in downturns.
John Maynard Keynes contended that during recessions, private demand can stay weak indefinitely, so the government should spend to fill the gap and revive growth, even at the cost of deficits. This justified stimulus packages worldwide.
India's countercyclical spending during downturns, and large stimulus during the pandemic, reflects Keynesian thinking. Critics warn it can fuel deficits and inflation, sparking the long debate with monetarist and supply-side schools.
Related terms
- Fiscal PolicyFiscal policy is the government's use of taxation and spending decisions, set out mainly in the Union Budget, to influence the economy.
- MonetarismMonetarism, associated with Milton Friedman, holds that the money supply is the primary driver of inflation and economic activity, and that steady money growth is the best policy.
- Multiplier EffectThe fiscal multiplier effect is the ratio by which an initial change in government spending or taxation changes overall economic output, as money re-circulates through the economy.
- Crowding OutCrowding out is when heavy government borrowing soaks up available funds and pushes up interest rates, leaving less and costlier credit for private businesses.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.