We looked at a flow chart today showing how the increase in trade deficit leads to a decline in aggregate demand. Yet Keynesian theory says it should increase aggregate demand because the government is spending more. If this is clearly not working, what pushes the government to keep going? Are they only doing it because they realized they can have a bigger budget and do more under Keynesian policy?
The flow chart indicates that increased spending by a government results in the trade deficit getting smaller as the loanable fund market sees an increase in price which results in the dollar gaining value (meaning foreigners cannot buy as many American goods). I would argue what pushes politicians to adopt Keynesian theory is not them having read Keynes' general theory, but that Keynesian prescriptions are popular to votes who are not economically literate.