Economics: Taxation, Welfare, and International.

Because the theory was developed and became well known during the Great Depression, Keynesian economic policy is a strong framework. however, Keynes himself as well as the subsequent economists that built upon his theories limited themselves by not stressing factors such as inflation, future globalization,

public deficit, and long-term results of economic policy. These are several of the factors that ultimately limit the application of Keynesian economic policies to contemporary economies, through recessions in recent years have resulted in a resurgence of interest in application of Keynesian theory.

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Keynesian economic theory suggests that depression occurs in all economies periodically, and that depression is not necessarily self-correcting (Bootle, 2008). If no action is taken, depression can grow exponentially as individuals and businesses hoard their money. While this may be beneficial to the individual, to an economy this can drastically reduce overall spending, or aggregate demand, resulting in decline of economic conditions. Keynes asserted that this effect could be counteracted by the government, who during recession or depression could induce increase in aggregate demand by spending tax or borrowed money. This money could be acquired through borrowing, such as the sale of safe-investment government bonds to investors, or taxation of corporate profits (Yates, 2003, p. 135-136). In order for the acquisition of funds to make a positive economic impact the money must originate from hoarded funds possessed by high-income individuals and high-profit businesses—funds that would otherwise have stagnated, failing to stimulate the economy.

After the third party, normally a government body, has acquired funds, Keynesian economics insisted that those funds must be inserted into the economy immediately in order increase spending and thus increase aggregate demand.

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