Student videos

Coronavirus crisis: Keynesian insights

  • Levels: A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

In this video we look at some key Keynesian insights into how a fiscal stimulus can help support income, demand and jobs during the crisis.

Coronavirus crisis: Keynesian insights

Some insights

  1. Monetary policy has a role to play but can become ineffective in supporting demand at very low nominal interest rates because of the liquidity trap
  2. Animal spirits drive consumer spending, saving and investment and fears of a slump can become a self-fulfilling prophecy
  3. The state has a key role in supporting the economy and not just relying on automatic stabilisers
  4. When private sector demand collapses, the public sector – mainly via a fiscal policy stimulus – needs to intervene (free market forces do not equilibrate)
  5. Escaping from old ideas is difficult – policy-makers need to be bold and maybe challenge conventional wisdom

Keynesian economics in a crisis – policy is about “keeping the lights on”

  • Immediate injections of extra spending into public health care
  • Wage subsidies to maintain employment (including the self-employed)
  • Deferral of VAT for businesses and income tax for self-employed deferred too
  • Germany government is jettisoning a long-held commitment to a balanced budget
  • USA stimulus package injects money directly into millions of household budgets

Challenges

  • How large will the fiscal deficit reach and with what consequences for the National Debt?
  • Who will pay the higher taxes needed to control thenational debt?
  • Are there risks of a surge in inflation if a fiscal stimulus is financed largely by central bank purchases of new government debt?
  • Will the chosen tools of fiscal policy work? How large will the stimulus have to be? (Much depends on resolving the public health issue)
  • Will the stimulus be followed by a period of austerity or have lessons been learned from austerity post 2009?

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