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RELEVANCE OF KEYNESIANTHEORY TO THE CURRENT
ECONOMIC CRISIS
By
M.B.Jithya,
Aadhavan Somappa.R,N.Siva krishna reddy,
M.Abdula Ansari,
Shringar Manjari Tiwari,
G.Kumar babu.
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Contents
Keynesian theory,
Eurozone crisis,
Feasibility of Keynesian theory,
Relevance of Keynesian theory to crisis,
How to overcome crisis,
How it will effect India's economy,
Conclusion.
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Theory of income & Employment
Keynes offered this theory in 1936 and explained in this theory
that employment depends upon the income.
If the standard of national income is higher then rate of
employment will also be higher.
On the other hand if the level of national income is lower then
the level of employment will also be lower.
The equilibrium level of income and employment will be that
where aggregate demand is equal to the aggregate supply.
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Two components
Aggregate demand
Aggregate supply
According to Keynes full employment situation
is equal to AD=AS. This point is known aseffective demand.
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CRITICISM
In the under developed countries there are so many other
factors which are responsible for unemployment, like over
population and lack of skill.
Perfect competition is not found in real world.
In the long run its chances of success are limited.
It is not applicable in socialistic economy.
This theory was produced by the depression of 1930 and it is
not applicable in ordinary economic condition.
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EURO ZONE CRISIS
Euro zone is the economic and monetary union of mem
ber countires ofeurope who have adopted euro as their currency.
The countries who use euro as their currency come under Euro Zone.
The Euro Zone formed in late 90s.They had formed a European CentralBank.
When any country in Euro Zone needs infrastructure development it
will get funded as a debt by the european central bank in form ofgovernment bonds .
The idea that euro zone started was to develop weak countries likegreece to fund it with cheaper interest rates and develop the countryeconomically.
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Contd
The PIIGS(Portugal, Italy, Ireland, Greece, Spain) whichare weak countries borrowed money from European CentralBank and spent it recklessly.
The fiscal agendas now they had trouble repaying theseloans. Now these countries became defaulters.
Due to this panic situation which alarmed investors , theyare now investing in safe options like government bonds.
Due to this the overall stocks collapsed in these countrieswhich had negative effect on both country as well as globalmarkets
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Feasibility of Keynesian theory in
US Crisis
Integrated approach to Monetary measures
Application of Keynesian theory
Will US Succeed in Bailing out its Economy by
applying the Keynesian theory? Seeds of Recession in US
Need to Stop 'Leveraged' Spending
US bail out of Finance Companies Is it a Right Approach?
Direct approach of killing US Recession
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Feasibility of Keynesian theory in
Indian Slowdown Fundamentally, India has not gone wrong on any major aspects. But,
the infrastructure spending continues to be lower side even till date.
The Keynesian approach is more useful in case of Indian economythan US economy where there is faltering on certain fundamental
factors which specifically needs a correction in initial phase.
On the other hand, Indian economy which is still largely deprivedfrom domestic infrastructure spending would specifically benefit onaccount of large government spending on infrastructures & industries
along with cut in tax rates.
which may disburse more liquidity in the hands of people and thusenabling higher spending & consumption phenomenon.
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THE KEYNESIAN RATIONALE
Theoretical arguments of John Maynard Keynes in GLOBALCRISIS
The global financial crisis suggests that government intervention is
necessary
The market players cannot form correct perceptions about the
direction of the economy
At the core of his theory one can make notice of the uncertaintyabout the future .
Uncertainty is not only the main reason for the instability of the
economies but also hinders the recovery from economic crisis
The states should intervene through the expansion of fiscal policies
in order to maintain the appropriate effective demand in theeconomy.
This kind of socialization of investments could stabilize the
economy.
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Contd
The states should also take the role of investors by creating variouscompromises and cooperation mechanisms between public and
private parties to ensure full employment
If the state does not take action to stabilize the total expenditure thatit is needed to stabilize the economy then the market economy
becomes unstable as investments are affected by the uncertain
expectations about future developments.
In good times, the states should maintain budget surpluses but during
financial turmoil should intervene to market economy by creating
deficits in order to give the necessary impetus for growth.
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HOW TO OVERCOME
EUROZONE CRISIS
Countries affected must:
Grind down wages
Raise productivity Slash spending
Raise taxes
Transparent banking system Endure such austerity drives for many years
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EFFECTS ON INDIA
Indias exports to Europe could witness aslump close to 10%.
Export driven sectors such as textiles and
software's are likely to bear the brunt. About 22-28% revenues of India's top tech
major come from Europe whose revenues will
definitely affect. Govt overall target of $200 billion for the
fiscal could be at stake
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Conclusion
The US crisis led to global financial crisis,which further spread to Eurozone and causedEurozone crisis, as these countries were most
affected. Hence probably Keynesian theory could help
the countries to come out of crisis and itmentions the role of government.
Inthe long run we are all dead
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