Explain how the government policies suggested by Keynes could move the economy to a higher level of employment.
The correct answer and explanation is:
Correct Answer:
Government policies suggested by Keynes could move the economy to a higher level of employment by increasing aggregate demand through fiscal policy, including higher government spending and lower taxes.
Explanation (300 words):
John Maynard Keynes proposed that during times of economic downturns, especially recessions or depressions, the private sector may not spend enough to maintain full employment. In such situations, the economy can remain stuck in a state of high unemployment and low output. Keynes argued that the government should intervene to stimulate demand and lift the economy to a higher level of employment.
Keynesian economics emphasizes the use of fiscal policy to influence demand. One of the primary tools is increased government spending on infrastructure, education, healthcare, and other public services. This spending puts money directly into the hands of workers and businesses, which boosts consumption and investment. As demand increases, businesses respond by producing more goods and hiring additional workers, leading to higher employment levels.
Another major tool is reducing taxes, particularly for middle- and lower-income households. When taxes are lowered, individuals have more disposable income to spend. This rise in consumer spending also boosts demand for goods and services, prompting firms to expand production and employment.
Keynes also emphasized the multiplier effect, where an initial increase in spending leads to a larger overall increase in economic output and employment. For example, when the government builds a road, it hires construction workers, who then spend their wages on goods and services, creating jobs in other sectors as well.
These policy measures are especially important when private investment is low and consumer confidence is weak. In such cases, only government action can fill the gap in demand and prevent a prolonged economic slump.
By increasing aggregate demand through fiscal policies, Keynes believed the government could reduce unemployment and guide the economy toward full employment and sustained growth.