How does Keynesian Economics explain recessions and depressions?

Keynesian Economics explains recessions and depressions through the concept of aggregate demand and the role of government intervention in stabilizing the economy. According to Keynesian theory, recessions and depressions occur due to a deficiency in aggregate demand, which refers to the total spending in the economy.

Keynes argued that during recessions, there is a decrease in private sector spending, leading to a decrease in overall demand for goods and services. This decline in demand results in a decrease in production, leading to unemployment and a decline in economic activity. Keynes referred to this as a "demand-deficient" or "cyclical" unemployment.

To address recessions and depressions, Keynesian Economics suggests that the government should intervene to stimulate aggregate demand. This can be done through fiscal policy, which involves government spending and taxation. During a recession, the government can increase its spending on infrastructure projects, welfare programs, or other public investments to boost demand and create jobs. Additionally, the government can reduce taxes to increase disposable income and encourage consumer spending.

Keynesian Economics also emphasizes the importance of monetary policy in managing recessions. The central bank can lower interest rates to encourage borrowing and investment, which in turn stimulates demand and economic growth. By manipulating interest rates and controlling the money supply, the central bank can influence aggregate demand and stabilize the economy.

Overall, Keynesian Economics explains recessions and depressions as a result of insufficient aggregate demand. It suggests that government intervention through fiscal and monetary policies can help mitigate these economic downturns by stimulating demand and promoting economic growth.