The Keynes Effect is a term used in economics to describe a situation where a change in interest rates affects expenditure more than it affects savings. As prices fall, a given nominal amount of money will become a larger real amount. As a result the interest rate will fall and investment demanded rise. This Keynes effect does not occur in the liquidity trap. Economics is the social science studying production and consumption through measurable variables. ... In finance, interest has three general definitions. ... In economics, a liquidity trap is a situation when the economy is stagnant and the interest rate is equal to, or slightly above, 0 percent. ...
The Pigou Effect led to a great debate in monetary theory, but as the debates had led, effectively, to the conclusion that the Pigou Effect had to work on a very narrow band of assets, it was presumed that, even if it existed, the power of the Pigou Effect could be empirically ignored.
The second effect was already expressed in Keynes (1931) and in Irving Fisher (1933) and is known as the "Debt-Deflation Effect".
This Debt-Deflation Effect was given a central role by James Tobin (1980), J. Caskey and Steve Fazzari (1987) and Thomas Palley (1996).
Keynes explained the level of output and employment in the economy as being determined by Aggregate Demand.
Although Keynes' theory suggested that the economy need not automatically tend towards full employment, it also suggested that active government policy could be effective in managing the economy.
Keynes advocated counter-cyclical fiscal policies: deficit spending when a nation's economy was sluggish and the surpression of inflation in boom times by either increasing taxes or cutting back on government.
Feeds |
Contact