ECON545 Lecture 6 Overview

The Keynesian model predicts that an economy could decline and settle into a prolonged period of high unemployment and recession or depression, and there is no automatic tendency of self-correction. The economy is like an elevator in constant motion. Sometimes it settles on the top floor, but it is just as likely to settle in the basement and stay there. Therefore, some kind of outside stimulus is needed to shift the aggregate expenditure line upward and increase equilibrium GDP. What kind of outside stimulus? It would be great if private capital investment spending could be relied upon for the needed stimulus, but precisely because the economy is down and profit prospects are poor, business firms will not be willing to take the long-term risks of investing in capital goods.
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