Professional Documents
Culture Documents
Determination
Yes
No
Not sure
I dont care (were
all dead soon)
Keyness Analogy
Multiplier Example
Lets say a government spends $1 billion ($1,000
million) on the construction of a stadium.
This increases construction workers incomes by
$1 billion, compared to if the government hadnt
spent the money.
What happens to this $1 billion?
Example (contd)
Lets assume that the construction workers spend
80% ($800 million) of their additional income. We
say that their Marginal Propensity to Consume
(MPC) is 80%.
Lets say they spend it on clothes.
Example (contd)
This generates $800 million in additional income
for the clothes suppliers.
What happens to the $800 million?
Example (contd)
$512
$640
$800
$1,000
Example (contd)
Thus, total spending in the economy increases
by (in millions):
$1,000 + $800 + $640 + $512 + = $5,000
Example
$5,000 million is 5 times $1,000 million.
$1,000 is the initial government spending change.
Keynes called this factor 5 the multiplier.
Multiplier Example
If the MPC = .8, then
m = 1 / (1 .8) = 1/(.2)
= 5.
Conclusion:
Keynesian policy may help the economy in
the short run, but is harmful to the economy
in the long run.
Aggregate Demand
The Aggregate
demand curve
is downward
sloping
According to
Keynesian theory,
an increase in AD
in the vertical
part of the AS curve
increases the
price level.
According to
Keynesian theory,
an increase in AD
in the upward
part of the AS curve
increases GDP and
the price level.
According to
Keynesian theory,
there exists an
inverse relationship
between inflation
and unemployment.
According to
Classical theory,
an increase in AS
increases GDP, and
lowers the price
level.