"Mesa de Estudos: Understanding Keynesian Economics and Financial Accounting"

André Gonçalves de Freitas

André Gonçalves de Freitas

Mar 20, 20244 min read

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"Mesa de Estudos: Understanding Keynesian Economics and Financial Accounting"

Introduction:

The Keynesian doctrine, named after renowned British economist John Maynard Keynes, revolutionized the way governments interact with the economy. This doctrine introduced the idea that public budget could be used as a tool for fiscal policy, a concept that contrasted with prevailing economic concepts at the time. Keynes argued that during economic recessions, governments could intervene and stimulate the economy through increased public spending. On the other hand, during economic expansions, governments could use the public budget to prevent overheating of the economy by reducing public spending or increasing taxes. These interventions were deemed necessary to stabilize the economy and avoid significant fluctuations in the economic cycle.

Keynesian Economics and Aggregate Supply:

According to Keynesian theory, aggregate supply is horizontal, with prices and wages being rigid. This implies that changes in aggregate demand, influenced by fiscal policy, can have a significant impact on output and employment levels. By manipulating government spending and taxation, policymakers can influence aggregate demand and stabilize the economy.

The Keynesian Model:

Consider the simple Keynesian model, which includes consumption, investment, government, and the external sector. In this model, the spending multiplier increases when there are changes in autonomous spending, such as investment or government spending. The multiplier effect refers to the idea that an initial change in spending leads to a larger change in overall economic activity.

In the given simple Keynesian model, with a consumption function of C = 100 + 0.2Y, where C represents consumption and Y represents income, and assuming autonomous investment and government spending are both equal to 10, the equilibrium income in the model can be calculated. Additionally, the tax rate applied to income can also be determined based on the marginal propensity to consume.

The Neo-Keynesian Perspective:

The Neo-Keynesian school of thought incorporates additional factors into the Keynesian framework. One such factor is the marginal propensity to import, which represents the portion of an increase in income that is spent on imported goods and services. A higher marginal propensity to import and a lower marginal propensity to consume can have implications for the determination of equilibrium income in the Keynesian model.

Costs of Menu and New-Keynesian Theory:

According to the New-Keynesian theory, menu costs explain the stickiness of prices in the short run. Menu costs refer to the costs incurred by firms when changing prices, such as the cost of printing new menus or updating price tags. These costs create a rigidity in prices, which can contribute to price stickiness and affect the adjustment process in the market.

Adjustment in the Keynesian Model:

In the Keynesian framework, if there is excess demand in the goods market, the adjustment occurs through an increase in production and income. This adjustment mechanism, known as the multiplier effect, relies on changes in aggregate demand to drive economic activity. By increasing government spending or reducing taxes, policymakers can stimulate aggregate demand and promote economic growth.

Financial Accounting and Events Subsequent to the Reporting Period:

In financial accounting, events subsequent to the reporting period refer to events that occur after the end of the reporting period but before the issuance of the financial statements. These events may or may not require adjustments in the financial statements. According to the CPC 24 accounting standard, events subsequent to the reporting period that do not require adjustments include events that provide evidence of conditions that arose after the reporting period, such as the completion of a restructuring plan or the sale of assets.

Conclusion:

Understanding Keynesian economics and financial accounting is essential for policymakers and financial professionals alike. By applying Keynesian principles, governments can use fiscal policy to stabilize the economy and promote growth. In financial accounting, events subsequent to the reporting period must be carefully evaluated to ensure accurate and reliable financial statements. To navigate these concepts effectively, here are three actionable pieces of advice:

1. Stay informed about economic theories and policies, such as Keynesian economics, to understand the impact of fiscal measures on the economy.

2. Keep up-to-date with accounting standards and regulations to ensure compliance and accurate financial reporting.

3. Continuously assess and analyze events subsequent to the reporting period to make informed decisions and maintain the integrity of financial statements.

By incorporating these insights into decision-making processes, individuals can better navigate the complexities of Keynesian economics and financial accounting, ultimately contributing to economic stability and sound financial practices.

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