Keynesian economics | Aggregate demand and aggregate supply | Macroeconomics | Khan Academy

What I want to do in this video is make an introduction. And we already have talked about it a bit, so basically they've already been introduced but it may be more of an elaboration of Keynisian thinking. So this here is a picture of John Maynard Keynes. I often mispronounce it as "Kiens" because it is spelled that way. But it's John Maynard "Keens".

And he was an economist who did much of his best-known work during the Great Depression, because in his opinion, classical models didn't seem to be of much use during the Great Depression. So to understand this a little better, let's compare the purely classical total supply and demand models with that which is perhaps more Keynisian. And something we've already talked about … Or Keynisian I should say, I already made my first pronunciation mistake. One that's more Keynisian, Keynisian like here. And in some of the videos, we've already begun to introduce a little bit of Keynisian thinking. But in this video we are going to try to show the differences between the two. And we are not saying that one is right and the other is wrong. In fact, Keynes realized that in the long run, the classic model definitely made sense. But he also famously made the statement, "In the long run, we're all dead." And I also want to emphasize that it is in defense of the Keynisian theory, that there are some points to be made about what he has to say.

But there are other schools of thought, unfortunately they often become very dogmatic, but they also have a number of reasons to be suspicious of the Keynisian theory. And we hope to cover some of these in future videos. But in this I just want to understand what Keynisan theory is and how it really was a fundamental departure from classical theory. So in classical theory … I am going to be total demand and total supply in both models. So this is the classic theory, this is the price, this is the real GDP here. And I'm going to do it for the Keynisian model too.

So this is price and this here is real GDP. In either conception of reality, or both models, you have a downward-sloping total demand curve for all the reasons we've discussed in several videos. This is total demand, this is total demand here. And we have already seen the classic view that in the long run the productivity of the economy, or production capacity, or production should not depend on prices. So we have seen that the long-term total supply curve is something like this. This is the long-term total supply. It is sometimes referred to as the 'Long Term Total Offer' and will be referred to. And they say, look, all prices are a way of signaling what people want and ask and things like that, but at the end of the day, prices and money just facilitate transactions.

And you go to work and get paid for this. But then you're going to use that money to buy other things that the economy produces, such as food, shelter, and transportation. So anything that is money is a way of facilitating transactions. But the economy, based on the number of people, the technology, what kind of businesses it has, what raw materials it has, will theoretically just produce what it produces. And if you want to change aggregate demand, for example, if the government wants to print money, and aggregate demand has to be extracted from helicopters, in the classic model, aggregate demand would simply shift to the right. But you have the vertical total supply in the long run, so the end effect is that it doesn't change production. All that happens is that the price goes from this equilibrium price to the equilibrium price here. So the price goes up and you will only experience inflation without increased production. There are several ways in which you could have shifted the total demand to the right. You can have a fiscal policy, where the government keeps the tax receipts constant but spends more.

Or it acts the other way around, it doesn't change spending but it lowers tax receipts. Both are trying to pump money into the economy and shift the aggregate demand curve to the right. And in the purely classical model it is argued that this makes no sense in the long term, it will only lead to inflation. And the only way you can increase production in an economy is to make it more productive. Perhaps by investing in technology, by making the economy more efficient, by population growth. So the only way is to shift this curve to the right, on the supply side here. And Keynes did not disagree, but in the midst of the Great Depression he said: 'Look, suddenly people are poor in the 1930s, companies did not collapse, people did not disappear.

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