When Spending Stops
WHEN SPENDING STOPS
Part 01 The opening

WHENSPENDINGSTOPS

John Maynard Keynes and the Revolution in Economic Thought

“What happens when everyone tries to spend less at the same time?”

“Imagine that tomorrow, everyone becomes afraid of the future. Families stop buying things. Businesses stop investing. Employers stop hiring. People lose income, so they spend even less.

The question Keynes asked was: can an economy get stuck in this situation?”

Part 02 Inside the Great Depression
The Evening Ledger
Late City Edition1929 – 1933Price Two Cents

STOCK MARKET COLLAPSE

BANK FAILURES

Depositors queue from dawn as banks close their doors. Thousands of banks fail across the nation and savings vanish with them.

MASS UNEMPLOYMENT

By 1933 roughly one American worker in four has no job. Breadlines stretch around city blocks.

BUSINESSES CLOSE

Factories fall silent as orders dry up. Firms cut wages, then workers, then shut entirely.

A reconstruction made for this project. The paper is fictional; the events are not.

“Why didn't the economy simply fix itself?”

Classical economics expected falling wages and prices to restore full employment. Instead, unemployment stayed high for years.

Part 03 The Keynes case file
Subject: Macroeconomics
Ink drawing of John Maynard Keynes
Name of subject
John Maynard Keynes
1883 – 1946
  • British economist
  • Worked during periods of major economic instability
  • Published The General Theory of Employment, Interest and Money in 1936
The question

Why can an economy experience prolonged unemployment?

Part 04 Graph #1 · Aggregate demand & supply

When demand moves, output follows

Keynesian AS: flat with spare capacity, rising as the economy nears full employment (Yf).

Increased aggregate demand can increase real output and employment, particularly when the economy has spare capacity. Drag AD₂ left and the same logic runs in reverse.

Consumer confidence ↓
↓
Consumption ↓
↓
Aggregate demand ↓
↓
Real output ↓
↓
Employment ↓
↓
Household income ↓
↓
Consumption ↓ again ↺

The recession is no longer just “people bought less.” It becomes a self-reinforcing fall in economic activity. That's Keynesian thinking.

Part 05 Graph #2 · The circular flow of income

Spending is somebody else's income

Arrow widths scale with each flow. Moving dots = money in circulation.
Leakages (share of income)
Injections ($bn)

“What happens if spending leaks out faster than new spending enters?”

Part 06 Graph #3 · The multiplier
k = 1 / (1 − MPC)
Spending in each round, and the running total
Initial injection

Under the simplified assumptions of the multiplier model (closed economy, no taxes, fixed prices, spare capacity).

The classroom multiplier

“The government has injected $100 into the economy.” Hand the money on, one classmate at a time.

“The initial injection is only $100, but because spending becomes income for somebody else, the total impact can be much larger.” With MPC = 0.8, k = 5: a $1 billion rise in government spending could raise national income by up to $5 billion.

Part 07 Graph #4 · The recessionary gap

Stuck below full employment

Potential (full-employment) output, Yf: what the economy could produce with all its resources employed.

Actual output, Y₁: where AD meets AS. Here it sits well short of Yf.

The space between them is the recessionary gap: idle factories and workers who want jobs but cannot find them.

Keynes challenged the idea that an economy would necessarily return rapidly to full employment simply through market adjustment.

“So if private demand isn't strong enough, who can increase demand?”

Part 08 The government enters
CABINET OFFICE · EMERGENCY SESSIONMINUTE No. 31 · MOST URGENT

⚠ ECONOMIC EMERGENCY

  • Unemployment ↑
  • Consumption ↓
  • Investment ↓
  • Aggregate demand ↓

WHAT SHOULD THE GOVERNMENT DO?

The scenario is fictional. Tap + for each raised hand, then reveal.

Part 09 Expansionary fiscal policy

Same policy, different results

Government spending ↑ or Taxes ↓
↓
Aggregate demand ↑
↓
Real GDP ↑
↓
Employment ↑ potentially

But the impact depends on economic conditions.

With substantial spare capacity, the output effect may be larger. Close to capacity, the same policy may create greater inflationary pressure.

A tax cut shifts AD by less than an equal rise in G, because households save part of it.

Part 10 Keynes vs the classical view
Before 1936

CLASSICAL APPROACH

Markets and price/wage adjustments can help restore equilibrium.

  • Unemployment → wages fall → firms hire again
  • Saving flows into investment through interest rates
  • The economy tends back to full employment
  • Role of government: limited, balance the budget
WAIT FOR THE MARKET OR INTERVENE?
The General Theory, 1936

KEYNESIAN CHALLENGE

An economy can experience insufficient aggregate demand and prolonged unemployment.

  • Wages can be sticky downward
  • Lower wages also mean lower incomes and less spending
  • Saving more can lower total income: the paradox of thrift
  • Role of government: support demand in a slump

“In the long run we are all dead.” Keynes wrote this in 1923 against waiting for markets to correct themselves. Policy, he argued, has to deal with the years people actually live through.

Part 11 The book

1936: THE GENERAL THEORY

1

Effective demand

The level of aggregate demand influences output and employment.

2

Involuntary unemployment

People can be willing to work but remain unemployed because overall demand is insufficient.

3

Macroeconomic stabilisation

Government policy can potentially influence aggregate demand and economic activity.

Illustration, not a scan. Replace with a photo of the first edition for your slides.

Part 12 The advanced graph · Phillips curve
Inflation ↔ unemployment

Expansionary policy can reduce cyclical unemployment, but stronger demand can also create inflationary pressure: a movement up the short-run Phillips curve (SRPC).

“Can policymakers reduce unemployment forever just by increasing demand?”

Once people expect higher inflation, the SRPC shifts up and unemployment returns to its natural rate (the LRPC).

Part 13 But Keynes wasn't the end of economics

THE CRITICS RESPOND

Keynes transformed macroeconomics, but his ideas did not end the debate over how economies should be managed.

Part 14 Keynes today

DID KEYNES DIE IN 1946?

Keynes's ideas remain influential in debates about aggregate demand, recessions, fiscal policy and economic stabilisation, although modern macroeconomics incorporates many ideas that developed after Keynes.

Part 15 The big evaluation

SO, WHAT DID KEYNES ACTUALLY CONTRIBUTE?

“Keynes's most important contribution wasn't simply telling governments to spend more. It was changing the question economists asked about recessions.”

Great Depression→Keynes→AD→Multiplier→Fiscal policy→Criticism→Modern macro
Part 16 The ending

“What happens when everyone stops spending?”

Keynes's contribution was to show that an economy can experience a persistent deficiency of aggregate demand, creating unemployment and unused resources. His work changed how economists understood recessions and opened a much larger debate about the role of government in stabilising the economy.

WHEN SPENDING STOPS…Who keeps the economy moving?