"Good day, everyone.

Today, I’m going to

introduce a theory that has played a crucial role Context:
in shaping modern economic policies—the The Great Depression (1929-1939) was a severe
Keynesian Theory. Developed by the economist worldwide economic crisis that led to high
John Maynard Keynes, this theory emphasizes unemployment, a collapse in production, and
the importance of government intervention in widespread poverty. Traditional “classical
managing economic cycles, especially during economics”, which advocated for minimal
times of recession. Let's explore how this theory government intervention, failed to provide
has influenced governments' responses to solutions. This is when Keynes proposed that
economic challenges over the years." governments need to intervene actively,
especially during downturns, to stimulate
demand.
Introduction to Keynesian Economics

Context: Example:
Keynesian economics was developed by “John During the Great Depression, the U.S. economy
Maynard Keynes”, a British economist, during shrank by almost 30% between 1929 and 1933,
the “Great Depression” of the 1930s. At that and unemployment reached 25%. Classical
time, economies around the world were economic theory, which advised non-
suffering from massive unemployment, intervention, failed to address the deepening
deflation, and low demand, leading Keynes to crisis. It was against this backdrop that Keynes
propose a new way of thinking about how developed his ideas. He proposed that
economies function, especially during governments should actively increase public
downturns. He challenged the classical belief spending and use deficit financing (borrowing)
that free markets would naturally lead to full to stimulate demand, thereby reversing the
employment and proposed that active downward spiral.
government intervention was necessary to
manage demand in the economy.
Key Concepts of Keynesian Theory
Example:
In 1936, John Maynard Keynes published "The Context:
General Theory of Employment, Interest, and Keynes believed that the level of “aggregate
Money", a seminal work where he laid out the demand” determines overall economic activity.
foundations of Keynesian economics. In it, Unlike classical economics, which assumed that
Keynes argued that during economic supply would create its own demand (Say's
downturns, governments must step in to boost Law), Keynes argued that insufficient demand
demand. His theory emphasized that economies could lead to prolonged periods of
don’t always self-correct in the short term, unemployment. His concept of the “multiplier
especially when consumer and business effect” explained how increased government
confidence is low, and that public spending is spending could lead to a proportionally larger
necessary to stimulate demand. increase in total economic output.

Historical Context
Example: would naturally correct itself over time without
The multiplier effect in action: government intervention. Here’s what he meant
In response to the Great Depression, President by that:
Franklin D. Roosevelt initiated the New Deal in Context of the Statement
the U.S., which included government-funded  Classical Economists' View: Classical
infrastructure projects. For instance, the economists believed that the economy
construction of roads, bridges, and dams not would always return to full employment
only employed thousands of people directly but and stability in the long run, even after
also led to increased demand for materials, recessions or depressions. They
equipment, and other services, creating a emphasized that market forces, such as
"multiplier effect" that boosted overall changes in wages and prices, would
economic activity. naturally restore equilibrium.
 Keynes' Criticism: Keynes argued that
while this might be true in the long run,
Short-Run vs Long-Run the short run is where real people live,
suffer, and face unemployment,
Context: poverty, and economic hardships.
Classical economists focused on the “long-run Waiting for the economy to "fix itself"
equilibrium”, where markets eventually clear, could take years or even decades, and
and the economy returns to full employment. during that time, millions of people
Keynes, however, argued that in the “short-run”, would face unnecessary suffering.
wages and prices might be "sticky" and not Keynes' Perspective
adjust quickly enough, leading to prolonged Keynes believed that focusing too much on the
unemployment. He famously stated, "In the long run ignored the immediate problems
long run, we are all dead," emphasizing the people face in the short run, especially during
importance of addressing short-term economic economic downturns. In his view:
problems.  People cannot wait for the economy to
recover on its own while they're
unemployed and struggling.
During the 2008 financial crisis, central banks  Government intervention is necessary
around the world, such as the U.S. Federal to boost demand and speed up
Reserve and the European Central Bank, acted economic recovery to address short-run
quickly to provide emergency liquidity to crises.
financial institutions, while governments, His statement was a call to action—urging
including the U.S. under President Barack policymakers to focus on immediate solutions
Obama, introduced stimulus packages. These to economic problems rather than relying on
actions focused on the short-run stabilization of the assumption that everything would be fine in
the economy to prevent a deeper recession, the distant future. This idea became the
instead of waiting for markets to self-correct foundation of Keynesian economics, which
over the long term. advocates for active government policies to
stabilize the economy, particularly in times of
John Maynard Keynes famously stated, "In the recession.
long run, we are all dead" to criticize classical 4o
economic theories that argued the economy
 Kilos ng Ekonomiya: Sa paglipas ng panahon,
1. Maikling Panahon (Short Run sa Teoryang habang nag-aadjust ang mga presyo at sahod,
Keynesian) ang ekonomiya ay bumabalik sa buong
Kahulugan: Sa maikling panahon, ang mga employment at produksyon (natural rate of
presyo at sahod ay itinuturing na matigas o unemployment). Ngunit maaaring matagal ang
hindi agad nagbabago kahit may pagbabago sa proseso depende sa tindi ng pagbabago at sa
ekonomiya. kung gaano katagal mag-adjust ang sahod at
Kilos ng Ekonomiya: Sa panahong ito, ang mga presyo.
pagbabago sa demand (tulad ng biglang
pagbaba ng paggastos ng mga mamimili o Papel ng Gobyerno: Naniniwala ang mga
pamumuhunan) ay nagdudulot ng malalaking Keynesian na kahit na mag-aadjust ang
pagbabago sa produksyon at trabaho, ngunit ekonomiya sa mahabang panahon, maaaring
hindi agad naapektuhan ang mga presyo. masyadong matagal ang proseso, at magiging
mataas ang gastos sa lipunan dahil sa kawalan
Papel ng Gobyerno: Ayon kay Keynes, sa ng trabaho o mababang produksyon. Kaya,
maikling panahon, maaaring maranasan ng isinusulong nila ang aktibong mga polisiya
ekonomiya ang mahabang panahon ng resesyon upang pabilisin ang paggaling.
o kawalan ng trabaho. Kaya, mahalaga ang
interbensyon ng gobyerno (gamit ang fiscal Pokus: Sa mahabang panahon, ang mga factor
policy, tulad ng pagtaas ng paggastos o pagbaba sa supply tulad ng kapital, teknolohiya, at
ng buwis) upang pataasin ang demand at paglaki ng lakas-paggawa ang nagtatakda ng
mapunan ang agwat ng produksyon. potensyal na produksyon ng ekonomiya.

Pokus: Nakatuon ito sa kakulangan ng aggregate Halimbawa: Pagkatapos ng resesyon, sa

demand na nagiging sanhi ng kawalan ng kalaunan ay bababa ang sahod at presyo, muling
trabaho at hindi sapat na paggamit ng mga magha-hire ang mga negosyo, at babalik sa
pinagkukunan. normal ang produksyon ng ekonomiya. Pero
maaaring tumagal ito ng ilang taon kung walang
Halimbawa: Kapag may resesyon, hindi agad interbensyon.
binababa ng mga negosyo ang sahod dahil sa
mga kontrata, kaugalian, o takot na mawalan ng Sa madaling salita, sa teoryang Keynesian, ang
gana ang mga manggagawa. Kaya tumataas maikling panahon ay nakatuon sa mga problema
muna ang kawalan ng trabaho bago bumaba sa demand at ang pangangailangan ng
ang sahod. interbensyon ng gobyerno, habang sa
mahabang panahon, nag-aadjust ang
2. Mahabang Panahon (Long Run sa Teoryang ekonomiya pero maaaring mabagal ito, kaya't
Keynesian) mahalaga ang suporta ng mga polisiya.
Kahulugan: Sa mahabang panahon, mas
nagiging flexible o nag-aadjust na ang mga Role of Government
sahod at presyo sa pagbabago ng supply at
demand, at bumabalik ang ekonomiya sa buong Context:
potensyal nito o sa natural na antas ng Keynesian theory advocates for an active role of
produksyon. the government in managing economic
demand. During a recession, Keynes believed
that the government should implement
**counter-cyclical policies**—spending more
and cutting taxes to stimulate demand. During
economic booms, the government should do
the opposite, reducing spending and increasing
taxes to prevent overheating.

In your report:
- Outline how Keynesian theory supports
**counter-cyclical fiscal policy**: increasing
government spending in bad times and
decreasing it in good times.
- Give examples of **public works projects** or
**infrastructure investments** (like the U.S.
**New Deal**) that can boost employment and
demand.

Example:
A classic example of counter-cyclical fiscal
policy can be seen in the U.S. American
Recovery and Reinvestment Act (ARRA) of
2009. This $831 billion package included
increased government spending on
infrastructure, healthcare, and education to
boost employment and consumer spending. It
aimed to stimulate aggregate demand during a
period of declining private sector activity after
the 2008 financial crisis.