Explain the role of investors and the government in Keynesian economic theory.

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Posted on (Answer #1)

In Keynesian economics, both investors and the government are important.  However, the government is much more important in times of economic hardship.

Investment and investors are important for Keynesian economics.  However, they are really more important in good times than in bad.  In good times, people will invest money because they are relatively certain that they will get a good return on that money. When they invest, the economy tends to grow.  However, when times get bad, people tend to stop investing, according to Keynes.  This is in contrast to classical economic theory that said that investment would increase in bad times, helping to bring the economy back to full employment.

Instead, Keynes said, the government must play an important role in bad economic times.  In such times, he said, the government had to act to stimulate aggregate demand.  Consumers and investors would not be creating enough demand in those times and the economy would go into recession.  In order to bring the economy out of the recession, the government would have to spend money.  This would increase aggregate demand and bring the economy back to health.

Thus, both investors and the government are important to Keynes, but they are important at different times.


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