Abstract
AbstractIn this article we shall try to establish the guidelines of the Keynesian fiscal and monetary policies. In order to better understand the Keynesian macroeconomic system it is necessary to go briefly over the Classical economics in the pre-Keynesian period and the fiscal and monetary policies based on those analyses. While principally dwelling on the Keynesian macroeconomic system and the fiscal and monetary policies based on this system, we think we have some grounds about the significance of the subject. Firstly, the Keynesian analyses keep holding the balance of power in the theoretical field even in the post-Keynes era, and constitute the foundation of the macroeconomic textbooks. Secondly, despite the economic conditions of these days which have gone through many changes, and the emergence of anti-Keynesian views, the governments and monetary authorities (Central Banks) both in Europe and in the States, still implement – cautiously– fiscal and monetary policies in accordance with the Keynesian principles. In effect during Reagan era in the States and M. Thatcher in Britain, policies under the influence of Monetarism had been applied, however, since inflation was not prevented and there was an increase in unemployment, these policies were forsaken and moderate Keynesian policies were implemented low-key. But criticisms coming from both Monetarists and particularly New Classical economists forced fundamental methodological and assumptive changes in Keynesianism since the ‘80s; the school that emerged in the USA is called the New Keynesian Economics, in England the Post-Keynesian Economics.
Highlights
The Classical System visualizes a macroeconomic system where full-employment is reached automatically; and the Keynesian System visualizes a macroeconomic system where the economy ends up at a less-than-full-employment equilibrium due to the lack of effective demand
In the periods, when there is a demandpull inflation, to prevent the inflationary gap and demand-pull inflation which was created by the inflationary gap, the government is expected to reduce the level of effective demand again through fiscal and monetary policies
The fact that the interest elasticity of investment function is low in the Keynesian System would make it clear why in case of high Marginal Propensity to Save (MPS) at high income levels combined with low Marginal Propensity to Consume (MPC), the equilibrium would not automatically secure the fullemployment
Summary
The Classical System visualizes a macroeconomic system where full-employment is reached automatically; and the Keynesian System visualizes a macroeconomic system where the economy ends up at a less-than-full-employment equilibrium due to the lack of effective demand. The Keynesian System visualizes a macroeconomic system where the economy, when left to itself, ends up at a less-than-full-employment equilibrium due to the lack of effective demand or deflationary gap. In this case, to provide the full employment or at least to raise the employment level within a certain target by taking the price increases into account, it is required to implement fiscal and monetary policies. Lucas Jr. support the idea that any policy lacking a shock-like effect would be ineffective on the economy whereas basically this type of policy is not necessary These developments are covered in our article. AUTOMATIC FULL-EMPLOYMENT EQUıLıBRıUM IN THE EARLY CLASSICAL SYSTEM, THE QUANTITY THEORY OF
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