Who’s Who is the world of Keynesian Economics

I am currently in a Managerial Economics class where we are learning all about how the government influences the money supply, interest rates, and government expenditures. With our discussion of Keynesian economics, there have been a lot of technical names and terms thrown around. In order to understand Keynesian Economics, similar to a play, one must understand who the main characters are.

The goal of this post to help explain who few of the main characters/ideas are in Keynesian economics and what their role is:

Federal Reserve - The Federal Reserve was created in 1913 and essentially is a bank for banks. The Federal Reserve is a USA’s central bank and they determine/control the amount of money that is present in the economy. They also help determine interest rates. (This is important because when the Fed, being a bank for banks, lowers their interest rates, the easier and cheaper for banks to borrow from and the government and in turn lend to you).

The Treasury – In order for Keynesian economics to work, the government must have money available to spend. The role of the Treasury is to collect taxes and issues government bonds. These are essentially the two ways in which the government obtains funding. You have probably heard of the word deficit before. A deficit is where you spend more than you take in. The reason that US Government is able to run such a huge deficit, pay for bail-out packages, and essentially participate in Keynesian economics is the fact the treasury creates bond (or IOUs) for the government and then the sells them to public (primarily to China and Japan).

The President and Congress – As we learned in our readings, one of the main tenets of Keynesian economics is that the government should stimulate the economy through spending programs. This is where the President and Congress come in. The President and Congress determine how much and where the government spends its money. This is called fiscal policy. (Interestingly, this is where the most controversy comes in the government interaction with the economy, just watch the news!)

Fiscal Policy and Monetary Policy – Fiscal policy is how much and where the government spends its money (determined by Congress and the President). Monetary policy, is determined by the Fed, is determining how much money should there be in economy and what interest rates should be.

According to our readings and under Keynesians economics, when the economy goes into a recession the government increase government expenditures (the President and Congress), cut taxes (President, Congress, Treasury), and decrease interest rates (the Fed). Interestingly, during the last recession, the US government has done all three of these things!