Keynesian Economic Policies before and after 1970 Coursework

Keynesian Economic Policies before and after 1970 - Coursework Example Friedman suggested that governments have a central bank monetary policy whose main aim would be to sustain the equilibrium of demand and supply of money in the economy. As opposed to the Keynesian economics which mainly focused on value stability of a country’s currency and the panic resulting from insufficient supply of money that led to alternate currency and collapse, Friedman and his monetary policy focused on stability of prices as a result of the equilibrium between money supply and the demand of money (Lipsey and Chrystal, 2007). The Keynesian economic principles dominated the macroeconomic world in the 19th century in to the early 20th century, in a period characterized by the rise of capitalism. This period is referred to as the Golden Age of capitalism. The golden age of capitalism, led by The US and other Western economic powers especially after the World War II, (from 1945 to mid 1970s) saw the rise of capitalist nations in to major economic regions of the world. K eynesian Economic Policies A prevailing economic principle in the 1930s and during the Great economic depression was that the economy would recover by itself without any interventions from the government. A British Economist, Keynesian, then suggested that governments should increase their spending and cut taxes so as to revive their economies during the depression (Eatwell and Millgate, 2011). Without government intervention, he argued that the economy would be greatly affected by high unemployment rates and would never recover. In his opinion, increasing government spending during an economic downturn would help to boost demand, as well as setting off the chain of the chain of demand by suppliers and workers whose incomes would have been affected by the increased expenditure by the government. Reducing the tax burden would also enable people to have more disposable income, which would help to boost demand in the economy. He also contended that the most appropriate fiscal policy in periods of high unemployment is to run a deficit budget (Eatwell and Millgate, 2011). Keynesian’s ideas were largely ignored by both the British and the US Governments at the time, until after the World War II (Eatwell and Millgate, 2011). After the war, Keynesians principles of a fiscal policy, government involvement in spending and cutting taxes with the aim of maintaining employment rates became the center of attraction in macroeconomics, both in the debate of national economic policies as well as in research. In the US, the Employment Act (1946) helped the government to start using Keynesian’s economic principles to regulate its economy and improve the employment rate. Application of Keynesian principles saw governments regain economic stability throughout the 1950s and 1960s as they recovered from the economic depression. The Keynesian economic theory was based on the principle of a circular flow of money in the economy (Eatwell and Millgate, 2011). This implies that when one person spends money, kit results in another person earning money. This would then raises the demand of the later, leading him to also spend the money and through buying of goods and services, leading to another person earning the money and so forth. According to Keynes, it is this circular flow of money that enables economies to function well. According to the Keynesian Theory, the aggregate demand created by