Business Glossary

body of economic thought originated by the British economist and government adviser, John Maynard Keynes (1883-1946), whose landmark work, The General Theory of Employment, Interest and Money, was published in 1935. Writing during the Great Depression, Keynes took issue with the classical economists, like Adam Smith, who believed that the economy worked best when left alone. Keynes believed that active government intervention in the marketplace was the only method of ensuring economic growth and stability. He held essentially that insufficient demand causes unemployment and that excessive demand results in inflation; government should therefore manipulate the level of aggregate demand by adjusting levels of government expenditure and taxation. For example, to avoid depression Keynes advocated increased government spending and easy money, resulting in more investment, higher employment, and increased consumer spending.

Keynesian economics has had great influence on the public economic policies of industrial nations, including the United States. In the 1980s, however, after repeated recessions, slow growth, and high rates of inflation in the U.S., a contrasting outlook, uniting monetarists and "supply siders," blamed excessive government intervention for troubles in the economy.

agreement between the U.S. Treasury Department and the Federal Reserve Board of Governors that enabled the Fed to pursue an active monetary policy, independent of the Treasury and the federal government. Before 1951, the Fed had to assure low cost Treasury financing by purchasing Treasury securities at a set price. Afterward, the Federal Reserve Open Market Committee was able to purchase as much, or as little, of Treasury securities offered for sale by the Treasury Department as it wanted, instead of having to buy whatever the Treasury issued at the prevailing rate. Also known as the Treasury-Fed Accord.

heavy federal borrowing at a time when businesses and consumers also want to borrow money. Because the government can pay any interest rate it has to and individuals and businesses can't, the latter are crowded out of credit markets by high interest rates. Crowding out can thus cause economic activity to slow.

economic theory advocating drastic tax cuts and tax credits to encourage productive investments by corporations and achieve economic targets for growth in national output and employment. Supply side economists argue the importance of lowering marginal tax rates, which they say stimulates aggregate supply encouraging suppliers to produce more, and individuals to earn more, as opposed to stimulating aggregate demand for goods and services by consumers and businesses. In other words, people will work more because they can produce more. Supply siders argue that the economic stimulus of tax cuts and tax credits will offset revenue losses from cuts in marginal tax rates. In the early 1980s, supply side economics was a politically attractive solution to the stagflation (double-digit inflation accompanied by stagnant growth) characteristic of the late 1970s. It is counter to the keynesian economics school; supply siders reject the Keynesian multiplier argument that relates tax cuts to increases in aggregate demand.

body of economic thought originated by the British economist and government adviser, John Maynard Keynes (1883-1946), whose landmark work, The General Theory of Employment, Interest and Money, was published in 1935. Writing during the Great Depression, Keynes took issue with the classical economists, like Adam Smith, who believed that the economy worked best when left alone. Keynes believed that active government intervention in the marketplace was the only method of ensuring economic growth and stability. He held essentially that insufficient demand causes unemployment and that excessive demand results in inflation; government should therefore manipulate the level of aggregate demand by adjusting levels of government expenditure and taxation. For example, to avoid depression Keynes advocated increased government spending and easy money, resulting in more investment, higher employment, and increased consumer spending.

Keynesian economics has had great influence on the public economic policies of industrial nations, including the United States. In the 1980s, however, after repeated recessions, slow growth, and high rates of inflation in the U.S., a contrasting outlook, uniting monetarists and "supply siders," blamed excessive government intervention for troubles in the economy.

Federal Reserve Board decisions on the money supply. To make the economy grow faster, the Fed can supply more credit to the banking system through its open market operations, or it can lower the member bank reserve requirement or lower the discount rate-which is what banks pay to borrow additional reserves from the Fed. If, on the other hand, the economy is growing too fast and inflation is an increasing problem, the Fed might withdraw money from the banking system, raise the reserve requirement, or raise the discount rate, thereby putting a brake on economic growth. Other instruments of monetary policy range from selective credit controls to simple but often highly effective moral suasion. Monetary policy differs from fiscal policy, which is carried out through government spending and taxation. Both seek to control the level of economic activity as measured by such factors as industrial production, employment, and prices.

body of economic thought originated by the British economist and government adviser, John Maynard Keynes (1883-1946), whose landmark work, The General Theory of Employment, Interest and Money, was published in 1935. Writing during the Great Depression, Keynes took issue with the classical economists, like Adam Smith, who believed that the economy worked best when left alone. Keynes believed that active government intervention in the marketplace was the only method of ensuring economic growth and stability. He held essentially that insufficient demand causes unemployment and that excessive demand results in inflation; government should therefore manipulate the level of aggregate demand by adjusting levels of government expenditure and taxation. For example, to avoid depression Keynes advocated increased government spending and easy money, resulting in more investment, higher employment, and increased consumer spending.

Keynesian economics has had great influence on the public economic policies of industrial nations, including the United States. In the 1980s, however, after repeated recessions, slow growth, and high rates of inflation in the U.S., a contrasting outlook, uniting monetarists and "supply siders," blamed excessive government intervention for troubles in the economy.