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Keynesian perspective with respect to deficit spending

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Explain the Keynesian perspective with respect to deficit spending by the federal government.

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Solution Summary

The solution discusses how budget deficits stabilize the economy under a Keynesian perspective.

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Budget deficits were first proposed as a method of stabilizing the economy by Keynes. Keynes believed that aggregate demand determined real GDP. From the events of the 1930s, it was apparent to him that output and employment do not necessary move toward full employment levels. A sudden decline in demand can ripple through the economy, a companies lay off workers, which further reduces demand. He developed a model in which aggregate supply could be adjust to any level, depending only on the level of demand. The economy can thus become stuck at levels of low output, where only part of its resources are being ...

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