John Keynes Memo for his view on euroland policy

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In "Euroland policymakers are deeply divided about the appropriate policy" they should use in order to "overcome its own weakness" says Thomas Mayer, the managing director and senior economist of Goldman Sachs in Frankfurt (Mayer). Mayer says that Euroland "wants to stimulate domestic demand by lowering interest rates" and also they want to "increase disposable income and consumption... [by] encouraging labor unions to boost wages" (Mayer). These proposals, to stimulate the 11 countries in Euroland, have caught much opposition. The argument is that all the government appending being done to stimulate the economy is causing a resistance to "structural reform" and only covering up the problem (Mayer). For this situation Keynes would agree with either the government spending or the interest rate decrease. The reason behind this is as follows.

He would agree with an increase in governmental spending in order to stimulate the economy because Keynes believed in the multiplier effect and that household's income was "the chief determinant" of consumption (Buchholz 215).

The multiplier effect was quite simple, "any change in spending by one person starts a snowball effect, and the ultimate change in national spending [would] far surpass the initial change" (Buchholz 216). In other words if the market is in recession, a great way to stimulate it is to cause consumption, and "the higher degree of consumption, the higher the multiplier" (Buchholz 217). Thus if the government spending is increased during a recession, consumption will increase and in part more money will appear because of the multiplier effect and as a result the country will be taken out of recession.

Keynes would also agree with the cutting of interest rates during the Eurolands recession. This is so because when someone "cuts taxes... [it temporarily] leads to deficits until the economy rebounds" (Buchholze 220). When taxes...