John Maynard Keynes established a theory about why a government's fiscal and monetary policies of manipulating the official discount rate, tax rates and public works investment were a highly effective means of economic management.
Before Keynes' classic work "The General Theory of Employment, Interest and Money" was published in 1936, U.S. President Franklin D. Roosevelt revitalized an American economy in the throes of the Great Depression with his New Deal. His policies were based on the idea that Keynes was to expound later in his book. Keynes demonstrated, ex post facto, why the New Deal was so successful.
Keynesian economics is based on the theory that the market is imperfect, with nominal wages unlikely to decrease, frictional forces having effects and various forecasts often turning out inaccurate. Therefore, the theory goes, the government must intervene in the market with fiscal and monetary policies to correct imbalances such as unemployment and to eliminate uncertainties inherent in business cycles.
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