Table of Contents Why were Keynesian ideas revolutionary? 2 How does Keynes theory work? 4 What economic conditions in your news article that require government intervention? Do you have faith that this intervention will be effective? 7 How have the economists’ views on Keynesian economics changed over time? 9 Is Keynesian economics dead today? 12 Works Cited 14 Appendix A 15 Why you should be wary of the Japanese “revival” 15

Why were Keynesian ideas revolutionary?
Keynesian economics is a macroeconomic theory developed by John Maynard Keynes, who is a British economist. According to Keynesian theory, government intervention plays an important role in the economy, and focuses on short-term goals. It is used mostly in times of recession, inflation, unemployment to stabilize the business cycle, therefore active government policy is required and government spending is a good way to put money back into the GDP. (hupii.com) Keynes is famous for his simple explanation for the cause of the Great Depression during the 1930s. His idea was based on a circular flow of money, which states that when spending increases in an economy, earnings will also increase, and the outcome it will lead to even more spending and earnings (economic growth). His ideas had led to a revolution in economic thought. (martinfrost.ws) During the period of World War 2, United States president has spent enormously huge on defence which has that helped revive the U.S economy. Besides that, Paul Volcker has overcome the recession on 1980 – 1982 with Keynesian method. He had applied the technique of increasing interest rates and constricting the money supply, as the results the economic is recover. On the other hand, Keynes claimed that depending on markets to obtain full employment was not a good concept. Therefore, Keynes has removed the classical economic theory and introduced more general theory to ensure the full employment. According to Keynes, if the incomes were inflexible, those employees would be turn down to consider taking the lower nominal income, even though the price has lower by larger amount. This also will cause surplus of income to occur when the income level cannot be lower. Therefore, to overcome this, the solution is to increase the money supply by Federal Reserve. This is to ensure the increase in spending which will lead to more job opportunity. However, there is different when it comes to inflation, which the money supply needs to be constricted while during recession the money supply needs to be increase. Keynes is also well known as “the father of modern economics” and even the Keynes’ criticizers had named him as the greatest and most influential economist of 20th century. The Keynesian Revolution was introduced and it was known as neo-Keynesianism. The Keynes’s Revolution is related to issue of determining the level of employment and to the point that employment is a function of demand, but not supply.

How does Keynes theory work?
During recession, the government should adopt expansionary fiscal policy. Expansionary fiscal policy involves increasing government spending or reducing taxes. When there is recessionary gap, expansionary fiscal policy can be used. Recessionary gap exists when equilibrium GDP is below full-employment GDP. There is insufficient total spending which contracts or depresses the economy. This is where expansionary fiscal policy works by increasing government spending or reducing tax.

Figure 2.1 Recessionary Gap Figure 2.2 Inflationary Gap

In Figure 2.1, when it is assumed that yf is $100 billion and ye is $50 billion, the GDP gap would be $50 billion. However, the government does not need to increase its spending by $50 billion to remove recessionary gap. It is because of multiplier effect. Small increase in government spending would generate larger increase in real GDP.
Multiplier= 11-MPC = 1MPS
Marginal Propensity to Consume (MPC) determines the magnitude of the multiplier. MPC is the fraction of any change in disposable income spent on consumption. The size of the MPC and the multiplier are directly related. Therefore, the larger the MPC, the greater the multiplier will be. Marginal Propensity to Save (MPS) is inversely related to the multiplier. Smaller MPS would give larger multiplier. Therefore, assuming MPC is 0.8, the following is the calculation related to multiplier.

Multiplier= 11-MPC= 11-0.8=5
∆ real GDP= Multiplier × ∆ in initial spending
$100-50billions =5 × ∆ in intial spending
∆ in initial spending=$10 billions

Due to multiplier effect, the government just needs to spend $10 billion to close the recessionary gap.
During inflation, the government should adopt contractionary fiscal policy. Contrary to expansionary fiscal policy, it involves decreasing government spending or increasing taxes. When there is inflationary gap, contractionary fiscal policy can be used. Inflationary gap exists when equilibrium GDP is above full-employment GDP. There is excessive total spending which inflates the economy. This is where contractionary fiscal policy works.
However, there are some criticisms on Keynes’ multiplier effect. Keynes assumed that the price be fixed in his AE Model. However, in reality, price is not fixed; therefore, it is not a realistic model. In addition, using AD-AS Model, which allows the price levels to change, the multiplier effect is less potential; the effect is smaller than it would be if the price level were fixed. As shown in the Figure 2.3 below, an increase in investment will increase aggregate planned expenditure, but as price level rises, it will somewhat dampen aggregate planned expenditure. (McConnell & Brue)

Figure 2.3 Multiplier effect on AD-AS Model

What economic conditions in your news article that require government intervention? Do you have faith that this intervention will be effective?
Through the article, ‘Why you should be wary of Japanese revival’ that we read are regarding to the economy deflation in Japan. Deflation is a general prices decline which is caused by reduction in the supply of money.
Due to economy deflation, this condition which can lead to Japan nation does not enough using of money. The government has to spending money on their other projects as well as payment income for the public works. Besides that, Bank of Japan has to spend amount of money to purchase of financial assets. This situation actually can affect to the economy become worst. Japan nation also has to perform trading activities with other countries where the country currency is too strong than Japan. This condition is more burdens to government as they should spent more money on the import trading which the cost of import is higher.
Based on that situation above, the government spending is too high can bring the effects to their own country which is called budget deficit. Japan nation has to faces the problem such as high debt where Japan borrowed money from other country, poor corporate profitability, loss competitiveness because Japan currency excessive strongly and increase unemployment. (McConnell & Brue)
The articles suggest that this intervention will be effective. As we see, Japanese are afraid that banks will collapse so they prefer to buy (Japanese) Treasury bonds instead of saving their money in a bank account. So it means the money is not available for lending and therefore economic growth. The rate depresses consumption, but does not appear in the economy in an efficient form to spur new investment. (White, 2012)
Japan imports Chinese and other countries' inexpensive consumable goods, when the good product due to lower wages and inexpensive raw materials, many of which reached all time real price minimums in the world. Thus, prices of imported products are decreasing. So the local producers must match these prices in order to remain competitive. However the central bank needs to ease monetary policy more aggressively to help end deflation. (international economics)

How have the economists’ views on Keynesian economics changed over time?
The person who critics Keynesianism is Robert Lucas. Firstly, recession is self-correcting as when everyone is hoarding money, soon recession will happen. Recession will cause a cut in prices and labour wage. This means that the purchasing power had strengthen, which is the same as increase in monetary policy.
Secondly, economic indicators are both available at the same time to government and private businesses. Government will increase the money supply and private business as well will just reduce their prices. This will offset the effect. Therefore, Robert Lucas claims that government intervention will just interrupt the economy and therefore should not intervene. However, it is proven to be wrong. First, business owner are irrational and does not follow all the economic indicators to set price. Only economist will track the economic indicator and try to make the market efficient by changing the price. Secondly, recessions last for years, which is far longer than people's ignorance of their onset. Lucas and his followers searched for every model that would keep businessmen aware of the leading economic indicators and yet ignorant of the fact that they were in a recession.
Over times, the major critic for Keynes economic is from Milton Friedman also known as Monetarist. Monetarist accepts the definition of Keynes’ recession definition, but disagrees with the cure. He argued that government should butt out of the business of expanding and contracting the money supply as the money supply should keep it steady and only expand slightly each year to allow for healthy economic growth. This policy is named monetarism. During the 70s, Monetarism reached the peak. However, in the Great Britain during 1980s, monetarism is proved to be a disaster. The Bank of England tried its best to make it work. According to monetarism theory, it should enjoy low inflation and high stability, but it was totally opposite. Although at that time the inflation had come down, but this is because of the rising of unemployment. This is not healthy for the economic. At last, Bank of England had abolished the idea of Monetarism. Keynes economics do have some supporter as well, such as Alban William Housego `Bill' Phillips. He developed the Phillip Curve which illustrate the relationship between unemployment and inflation rate. He was influenced by Keynes that full employment and stability of price have no conflict. When an economy is below full employment, aggregate demand will not affect inflation. The Phillips Curve shows an inverse relationship between inflation and unemployment in an economy, which revised the classic Keynesian model.

Illustration of Phillips Curve.

Is Keynesian economics dead today? Keynesian economics is still used today. The global financial crisis in 2008-2009 showed that many economists and policymakers have abandoned the concept of free market and moved towards Keynesian economics. Some countries such as United States are using Keynesian economics through government stimulus programs. The stimulus programs are about the massive infusions of cash from government for infrastructure programs, green energy and education. It is to prevent the unemployment and get the economy working again. The largest fiscal stimulus is Barrack Obama’s stimulus package of $878 billion in 2009. (Farrell & Quiggin, 2012) In 2009, some of the Europe countries were seeing signs of recovery when they had implemented the fiscal stimulus package. There was also a rise in consumer confidence and business, especially in the emerging economics such as Brazil. The economy of Europe can get working again because the government responses according to Keynesian theory that markets do not self-correct automatically and the management policies are needed to revive the economy.
Besides, China is one of the countries that launch the fiscal stimulus package according to the Keynesian economics. It focuses on the compensation for the decline in aggregate demand due to the reduction in global demand. In 2009, there were signs of recovery in government and private investors of China such as increasing in commodity prices. It proved that the government had succeeded in using state-owned banks to inject liquidity into the real economy.
President Barack Obama has appointed self‐described Keynesians as some of his chief economic advisers, such as Christina Romer. Another Obama economic adviser, Larry Summers, “grew up in a Keynesian household” though he later came to believe that “Keynesian theory was not so much wrong as incomplete.” (Pearlstein) Keynesian economics has existed for many years and it has a great impact not only to economists but also the policymakers. Many economists nowadays have shift to Keynesian economics. Some governments also make the policies regarding to Keynesian view. This is because they believe that the Keynesian economics is more accurate. (Blinder)

Works Cited hupii.com. (n.d.). A REVIEW OF KEYNESIAN THEORY . Retrieved February 2013, from http://www.huppi.com/kangaroo/Keynesianism.htm martinfrost.ws. (n.d.). Keynesian economics . Retrieved February 2013, from martinfrost.ws: http://www.martinfrost.ws/htmlfiles/keynesian_economics.html
McConnell, C., & Brue, S. economics: Principles, Problems and Policies. Irwin McGeaw-Hill.
White, S. (2012, December 17). Deflation a Determined Foe in Japan . Retrieved February 2013, from new york times: http://www.nytimes.com/2012/12/18/business/global/deflation-a-determined-foe-in-japan.html?_r=2& international economics. (n.d.). Foreign Exchange Intervention . Retrieved February 2013, from international economics: http://intl.econ.cuhk.edu.hk/topic/index.php?did=9
Farrell, H., & Quiggin, J. (2012). Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis.
Pearlstein, S. Friedman Debunked the Gospel of Keynes. The Washington Post.
Blinder, A. S. Keynesian Economics

Appendix A
Why you should be wary of the Japanese “revival”
FE Alpha Manager David Coombs, who heads up the Rathbone Multi-Asset range, explains why he is unconvinced by the recent optimism surrounding Japanese equities.
By David Coombs, Rathbones 
Wednesday February 27, 2013 Since Japan’s bubble burst in 1990, investors have been repeatedly drawn to the prospect of a fundamental turnaround in its economy, only to be disappointed as it sputters and returns to deflation.
If Abeonomics is successful, then it may well represent the catalyst Japan has been waiting for to regain some competitive stature. But even then, and accounting for very long-term economic drivers such as population and productivity growth, Japan’s potential remains precarious without fundamental reforms.
Over the last few months, expectations for the Japanese economy have been raised following prime minister Shinzo Abe’s move towards aggressive monetary easing and big fiscal spending.
Abe's cabinet has approved a ¥20trn – or £140bn – fiscal stimulus package, to be spent on public works and other government projects.
The package is expected to create 600,000 jobs and spur a 2 per cent increase in real economic growth. As a result, investors have expressed renewed interest in Japanese equities.
The Bank of Japan has also switched to an open-ended commitment to purchase financial assets, starting in 2014, and bowed to government pressure to change the inflation target from 1 to 2 per cent.
It is hoped these measures will help Japan emerge from a prolonged bout of deflation and tackle the excessively strong Yen which has plagued the economy.
The sheer mention of these policies has seen the Yen fall against the US dollar, approaching ¥90 to $1 for the first time since 2010.
Since the Japanese bubble burst in the early 1990s, policymakers and politicians have been branded the main culprits behind the economy’s malaise, owing to their slow response to the crisis.
For this reason, the latest move by the central bank is seen as its most determined effort yet to end years of economic stagnation.
Several economists argue that a weaker Yen is necessary for Japan to compete globally for market share, and to boost Japanese equity prices.
With the incumbent Bank of Japan governor, Masaaki Shirakawa, due to step down in March, however, there remains uncertainty around whether the central bank will fulfil its new policy commitments.
If a suitable successor is found who, in the words of Abe, “fully understands that the Bank of Japan has a big role and a clear role in maximising jobs", the BoJ may well pursue its new mandate with vigour.
While a weak Yen is beneficial to Japanese exporters, it comes at a price – higher import costs that hurt both households and manufacturers.
Already, Japanese households are beginning to feel the pinch of the weaker currency, which has resulted in higher costs for petrol and some consumer goods.
Furthermore, exiting deflation remains a steep challenge for Japanese policymakers.
While the BoJ has agreed to uphold Abe’s 2 per cent inflation target – clearly through "good" demand-pull inflation – the central bank has warned that the target may be difficult to achieve and may risk spikes in government bond yields.
If history is any guide, then the economy needs to be in a rip-roaring state in order to exit deflation.
In the short-term, the cyclical outlook for the Japanese economy is improving, highlighted by a rise in Japanese exports, improving business surveys and a bottoming-out of private consumption.
This supports increased odds of a pick-up in the relative performance of Japanese equities versus global equities.
Performance of indices over 3 months

Source: FE Analytics
Despite this, the Japanese economy still faces major structural challenges including sky-high debt, a rapidly aging population, loss in competitiveness and, related to this, consistently poor corporate profitability.
So while recent policy shifts are encouraging, we believe that broad-based reforms are still necessary to defeat deflation and improve long-term economic growth potential.
And with regard to the nature of those much-needed reforms, your guess is as good as ours.
Assuming the BoJ honours its policy commitments, the cyclical outlook for the Japanese economy appears improved; however, it is premature to make a similar claim for the structural outlook and, therefore, the long-term investment case. Japanese equities continue to trade on a significant valuation discount to history, but without a structural improvement, investors have every reason to be sceptical about a longer-term and meaningful re-rating of the market.
We continue to monitor the situation.
FE Alpha Manager David Coombs heads up the Rathbone Multi Asset Strategic Growth, Total Return and Enhanced Growth portfolios. Only the last has any meaningful exposure to Japan, at 2 per cent.
The three funds of funds sit in the IMA Unclassified sector and do not have a benchmark. However, FE data shows that Coombs has beaten his peer group composite since he started running portfolios in June 2009.
Performance of manager vs peers since June 2009

Source: FE Analytics
The three funds require a minimum investment of £1,000 and have total expense ratios (TERs) ranging from between 2.33 and 3.03 per cent.
Reference:
http://www.trustnet.com/News/404993/why-you-should-be-wary-of-the-japanese-revival/1/