Keynes–Ramsey rule
The Keynes-Ramsey rule is a way to decide how much money the government should spend on things like schools, roads, and parks. It's named after two very smart guys who came up with this idea a long time ago.
Here's how it works:
Let's say you have a piggy bank with $10 in it, and you want to save some of it and spend some of it. You decide that you want to save $2 (for something really special), and spend the rest on toys and candy. So you have $8 left to spend.
But then you remember that your friend broke his arm and is going to the doctor. You want to help pay for his doctor visit. So you decide to give him $1 from your piggy bank.
Now you only have $7 left to spend. But then your mom reminds you that you need to save some money each week for college. So you decide to save $1 more from your piggy bank.
Now you only have $6 left to spend on toys and candy.
This is kind of how the Keynes-Ramsey rule works. The government has a big piggy bank (called the budget), and it needs to decide how much to save and how much to spend.
Keynes said that when the economy is doing badly (like when lots of people don't have jobs), the government should spend more money to help people out. This is kind of like giving your friend money for the doctor visit – the government is helping people who need it.
Ramsey said that the government should save some money for things like emergencies (like if there's a big flood or earthquake), and also to pay off any debts they might have. This is kind of like saving money for college – it's important to think about the future.
So the Keynes-Ramsey rule is a way to balance spending and saving to make sure the government is helping people in the short-term, but also thinking about the long-term.
Here's how it works:
Let's say you have a piggy bank with $10 in it, and you want to save some of it and spend some of it. You decide that you want to save $2 (for something really special), and spend the rest on toys and candy. So you have $8 left to spend.
But then you remember that your friend broke his arm and is going to the doctor. You want to help pay for his doctor visit. So you decide to give him $1 from your piggy bank.
Now you only have $7 left to spend. But then your mom reminds you that you need to save some money each week for college. So you decide to save $1 more from your piggy bank.
Now you only have $6 left to spend on toys and candy.
This is kind of how the Keynes-Ramsey rule works. The government has a big piggy bank (called the budget), and it needs to decide how much to save and how much to spend.
Keynes said that when the economy is doing badly (like when lots of people don't have jobs), the government should spend more money to help people out. This is kind of like giving your friend money for the doctor visit – the government is helping people who need it.
Ramsey said that the government should save some money for things like emergencies (like if there's a big flood or earthquake), and also to pay off any debts they might have. This is kind of like saving money for college – it's important to think about the future.
So the Keynes-Ramsey rule is a way to balance spending and saving to make sure the government is helping people in the short-term, but also thinking about the long-term.