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Chapter 12: Problem 7

List three practical problems with the Keynesian perspective.

Short Answer

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Problem 1: Time-lags in Policy Implementation - The delay in government's recognition and response to economic fluctuations can result in inappropriate policy implementation, exacerbating fluctuations and imbalances. Problem 2: Encouragement of Deficit Spending - Keynesian economics promotes deficit spending to stimulate growth, leading to increased government debt, high interest rates, inflation, and reduced investor confidence. Problem 3: Potential for Inefficiency and Misallocation of Resources - Government intervention, as emphasized in Keynesian economics, may lead to inefficiencies and misallocation of resources, resulting in reduced growth and inefficiency.

Step by step solution

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Problem 1: Time-lags in Policy Implementation

One of the issues with the Keynesian perspective is the time it takes for the government to recognize and react to economic fluctuations by implementing monetary and fiscal policies. This delay in response can cause policies to be applied when they are no longer necessary, exacerbating economic fluctuations and contributing to further imbalances.
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Problem 2: Encouragement of Deficit Spending

Keynesian economics advocates for government spending as a means to stimulate growth and counteract recessions. However, this can lead to increased government deficits, as the government is encouraged to spend more money than it collects in taxes during times of economic downturn. This continuous deficit spending can lead to the accumulation of government debt, which has long-term consequences on the economy, such as high interest rates, inflation, and reduced investor confidence.
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Problem 3: Potential for Inefficiency and Misallocation of Resources

The Keynesian perspective emphasizes the government's role in stabilizing the economy, but this intervention may lead to inefficiencies and the misallocation of resources. Since the government may not possess the same knowledge as private individuals and businesses, it might not allocate resources most effectively. This can result in funds being diverted to less productive sectors or investments, leading to reduced economic growth and inefficiency in the long run.

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Most popular questions from this chapter

Explain what economists mean by "menu costs."

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