RELEVANCE OF KEYNESIAN THEORY TO THE CURRENT ECONOMIC CRISIS

By M.B.Jithya, Aadhavan Somappa.R, N.Siva krishna reddy, M.Abdula Ansari, Shringar Manjari Tiwari, G.Kumar babu.

Contents
Keynesian theory, Eurozone crisis, Feasibility of Keynesian theory, Relevance of Keynesian theory to crisis, How to overcome crisis, How it will effect India's economy, Conclusion.

Theory of income & Employment

Keynes offered this theory in 1936 and explained in this theory that employment depends upon the income. If the standard of national income is higher then rate of employment will also be higher. On the other hand if the level of national income is lower then the level of employment will also be lower.

The equilibrium level of income and employment will be that

where aggregate demand is equal to the aggregate supply.

Two components Aggregate demand Aggregate supply According to Keynes full employment situation is equal to AD=AS. This point is known as effective demand.

CRITICISM

In the under developed countries there are so many other factors which are responsible for unemployment, like over population and lack of skill. Perfect competition is not found in real world. In the long run its chances of success are limited. It is not applicable in socialistic economy.

This theory was produced by the depression of 1930 and it is

not applicable in ordinary economic condition.

EURO ZONE CRISIS

Euro zone is the economic and monetary union of member countires of europe who have adopted euro as their currency.
The countries who use euro as their currency come under Euro Zone.

The Euro Zone formed in late 90s.They had formed a European Central Bank.
When any country in Euro Zone needs infrastructure development it will get funded as a debt by the european central bank in form of government bonds . The idea that euro zone started was to develop weak countries like greece to fund it with cheaper interest rates and develop the country economically.

Contd
The PIIGS(Portugal, Italy, Ireland, Greece, Spain) which are weak countries borrowed money from European Central Bank and spent it recklessly. The fiscal agendas now they had trouble repaying these loans. Now these countries became defaulters. Due to this panic situation which alarmed investors , they are now investing in safe options like government bonds. Due to this the overall stocks collapsed in these countries which had negative effect on both country as well as global markets

Feasibility of Keynesian theory in US Crisis

Integrated approach to Monetary measures Application of Keynesian theory Will US Succeed in Bailing out its Economy by applying the Keynesian theory? Seeds of Recession in US Need to Stop 'Leveraged' Spending US bail out of Finance Companies Is it a Right Approach? Direct approach of killing US Recession

Feasibility of Keynesian theory in Indian Slowdown

Fundamentally, India has not gone wrong on any major aspects. But, the infrastructure spending continues to be lower side even till date. The Keynesian approach is more useful in case of Indian economy than US economy where there is faltering on certain fundamental factors which specifically needs a correction in initial phase.

On the other hand, Indian economy which is still largely deprived from domestic infrastructure spending would specifically benefit on account of large government spending on infrastructures & industries along with cut in tax rates. which may disburse more liquidity in the hands of people and thus enabling higher spending & consumption phenomenon.

THE KEYNESIAN RATIONALE

Theoretical arguments of John Maynard Keynes in GLOBAL CRISIS The global financial crisis suggests that government intervention is necessary The market players cannot form correct perceptions about the direction of the economy At the core of his theory one can make notice of the uncertainty about the future . Uncertainty is not only the main reason for the instability of the economies but also hinders the recovery from economic crisis The states should intervene through the expansion of fiscal policies in order to maintain the appropriate effective demand in the economy. This kind of socialization of investments could stabilize the economy.

Contd
The states should also take the role of investors by creating various compromises and cooperation mechanisms between public and private parties to ensure full employment If the state does not take action to stabilize the total expenditure that it is needed to stabilize the economy then the market economy becomes unstable as investments are affected by the uncertain expectations about future developments. In good times, the states should maintain budget surpluses but during financial turmoil should intervene to market economy by creating deficits in order to give the necessary impetus for growth.

HOW TO OVERCOME EUROZONE CRISIS

Countries affected must: Grind down wages Raise productivity Slash spending Raise taxes Transparent banking system Endure such austerity drives for many years

EFFECTS ON INDIA
Indias exports to Europe could witness a slump close to 10%. Export driven sectors such as textiles and software's are likely to bear the brunt. About 22-28% revenues of India's top tech major come from Europe whose revenues will definitely affect. Govt overall target of $200 billion for the fiscal could be at stake

Conclusion
The US crisis led to global financial crisis, which further spread to Eurozone and caused Eurozone crisis, as these countries were most affected. Hence probably Keynesian theory could help the countries to come out of crisis and it mentions the role of government. In the long run we are all dead