This case study is a part of cirriculum of Macro economics. This Presentation will give the idea of John Maynard Keynes General Theory which is to use the Fiscal Policy to control the Aggregate Demand of the Economy. The case deals about President Kennedy's proposal of Tax Cuts.

1. A
Presentation on
Case study
“Keynesians in The White House”
By
Nikhil Gupta

2. Introduction
• This Case deals about Kennedy's Proposal of Tax cut which will increase the
Consumer Spending, Expand Aggregate Demand, and increase the country’s
Production and Employment.
• The Proposal of Kennedy’s Economic Advisers, James and Robert is based on
John Maynard Keynes General Theory.
• The Advisers proposed cutting taxes, they were putting Keynes idea into action.
• This Case is based on usage of Fiscal Policy in controlling Aggregate Demand.

3. What is Aggregate Demand?
Aggregate Demand is an economic measurement of the sum of all final goods and
services produced in an economy, expressed as the total amount of money exchanged
for those goods and services. Since aggregate demand is measured through market
values, it only represents total output at a given price level, and does not necessarily
represent quality or standard of living.
COMPONENTS OF AGGREGATE DEMAND
• It is helpful to keep in mind that aggregate demand for an economy is divided
into four components: consumption, investment, government spending, and net
exports. Changes in any of these components will cause the aggregate demand
curve to shift.
• Consumption(C)
• Investment(I)
• Government Spending(G)
• Net Exports(X-M)
Aggregate Demand(AD)= C+I+G+(X-M)

4. CONSUMPTION
This is made by households, and sometimes Consumption accounts for the larger portion of
aggregate demand. An increase in consumption shifts the AD curve to the right.
FACTORS THAT AFFECT CONSUMPTION
CONSUMER CONFIDENCE
If consumers are confident about their future income, job stability, and the economy is growing
and stable, spending is likely to increase. However, any job insecurity and uncertainty over
income is likely to delay spending. An increase in consumer confidence shifts AD to the right.
INTEREST RATES
Lower interest rates tend to increase consumption because larger goods are
usually purchased on credit and if interest rates are low, then its cheaper to borrow. Consumers
mostly borrow to buy houses, which is one of the biggest purchases and lower interest rates
means lower mortgage payments, so households can spend more on other goods. Some
Economists argue that lower interest rates also make saving less attractive, but there is no real
evidence. So, lower interest rates increase Aggregate Demand.
CONSUMER DEBT
If a consumer has a lot of debt, he is unlikely to buy more since he would have to pay his debt
off first. Low consumer debt increases consumption and aggregate demand.
WEALTH
Wealth are assets held by a household, such as property or stocks. An increase in property is
likely increase to consumption.

5. INVESTMENT
Investment, second of the four components of Aggregate Demand, is spending by
firms on capital, not households. Investment is the most volatile component of
AD. An increase in investment shifts AD to the right in the short run and helps
improve the quality and quantity of factors of production in the long run.
FACTORS THAT AFFECT INVESTMENT:
INTEREST RATES
Firms borrow from banks to make large capital intensive purchases, and if the
interest rate decreases, it becomes cheaper for firms to invest and provides incentive
for firms to take risk.
BUSINESS CONFIDENCE
If firms are confident about the economy and its future growth, they are more likely
to invest in capital, new projects and buildings/machinery.
INVESTMENT POLICY
If governments provide incentives such as tax breaks, subsidies, loans at lower
interest rates then investment can increase. However, corruption
and bureaucracy deters investment.
NATIONAL INCOME
As firms increase output, they would need to invest in new machines. This
relationship is known as The Accelerator. The assumption behind the accelerator is
that firms will want to maintain a fixed capital to output ratio, meaning that if a
factory uses one machine to produce 1000 goods, and the firms needs to produce
3000 goods more, then the firm will buy 3 more machines.

6. GOVERNMENT SPENDING
Government spending forms a large total of aggregate demand, and an increase in
government spending shifts aggregate demand to the right. Government spending is
categorized into transfer payments and capital spending. Transfer payments include
pensions and unemployment benefits and capital spending is on things like roads,
schools and hospitals. Governments spend to increase the consumption of health
services, education and to re-distribute income. They may also spend
to increase aggregate demand.
NET EXPORTS
Imports are foreign goods bought by consumers domestically, and exports are
domestic goods bought abroad. Net exports is the difference between exports and
imports, and this component can be net imports too, if imports are greater than
exports. An increase in net exports shifts aggregate demand to the right. The
exchange rate and trade policy affects net exports.

7. Fiscal policy
• Fiscal policy is the means by which a government adjusts its spending levels
and tax rates to monitor and influence a nation's economy.
• It is the sister strategy to monetary policy through which a central
bank influences a nation's money supply.
• These two policies are used in various combinations to direct a country's
economic goals.
• Before the Great Depression, which lasted from Sept. 4, 1929 to the late 1930s or
early 1940s, the government's approach to the economy was laissez-faire.
• Following World War II, it was determined that the government had to take a
proactive role in the economy to regulate unemployment, business
cycles, inflation and the cost of money.
• By using a mix of monetary and fiscal policies governments will control
economic phenomena.

8. How Fiscal Policy Relates to the AD-AS Model
• When setting FISCAL POLICY, the government can take an active role
in changing its spending or the level of Taxation. These actions lead to
an increase or decrease in aggregate demand, which is reflected in the
shift of the Aggregate Demand (AD) curve to the right or left
respectively .
• Expansionary policy shifts the Aggregate Demand curve to the right,
while contractionary policy shifts it to the left.

9. • Expansionary Fiscal Policy is used to kick-start the economy during
a recession. It boosts aggregate demand, which in turn increases output and
employment in the economy. In pursuing expansionary policy, the government
increases spending, reduces taxes, or does a combination of the two. Since
government spending is one of the components of aggregate demand, an increase
in government spending will shift the demand curve to the right. A reduction in
taxes will leave more disposable income and cause consumption and savings to
increase, also shifting the aggregate demand curve to the right. An increase in
government spending combined with a reduction in taxes will, unsurprisingly,
also shift the AD curve to the right. The extent of the shift in the AD curve due
to government spending depends on the size of the spending multiplier, while the
shift in the AD curve in response to tax cuts depends on the size of the tax
multiplier. If government spending exceeds tax revenues, expansionary policy
will lead to a budget deficit.
• A Contractionary Fiscal Policy is implemented when there is demand-
pull inflation. It can also be used to pay off unwanted debt. In pursuing
contractionary fiscal policy the government can decrease its spending, raise
taxes, or pursue a combination of the two. Contractionary fiscal policy shifts the
AD curve to the left. If tax revenues exceed government spending, this type of
policy will lead to a budget surplus.

10. References
• www.investopedia.com
• www.boundless.com
• www.intelligenteconomist.com

11. Thank you