keynesian - Keynesian Economics Expenditure Multipliers...

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Unformatted text preview: Keynesian Economics Expenditure Multipliers Sandeep Bhaskar Temple University Sandeep Bhaskar (Temple University) Keynesian Economics Expenditure Multipliers 1 / 26 Outline 1 Introduction 2 The Model 3 Role of Government 4 Conclusion Sandeep Bhaskar (Temple University) Keynesian Economics Expenditure Multipliers 2 / 26 Introduction John Maynard Keynes John Maynard Keynes is probably the most famous economist of the last century. This is what Time magazine had to say about him when they ran a cover story on New Year’s Eve in 1965: His radical idea that governments should spend money they don’t have may have saved capitalism. He did most of his work in the aftermath of the Great Depression and hence his views are influenced by what he saw around him. Sandeep Bhaskar (Temple University) Keynesian Economics Expenditure Multipliers 3 / 26 Introduction Keynesian Economics The stream of economics that asserts the importance of aggregate demand as the driving force of the economy. Towards this they argue that governments have the power to alter aggregate demand and hence influence the economy. Furthermore, they also argue that the government should use this power. Sandeep Bhaskar (Temple University) Keynesian Economics Expenditure Multipliers 4 / 26 Introduction Government Intervention Governments should intervene in the economy, but the intervention should vary with the state of the economy. The intervention should be countercyclical. Governments should increase spending in recessions: increases aggregate demand and pushes economy out of recession. Governments should reduce spending in expansions: reduces aggregate demand and prevents inflation. Sandeep Bhaskar (Temple University) Keynesian Economics Expenditure Multipliers 5 / 26 Introduction Government Intervention: When, Why, and Where? When? Only when unemployment is persistently high and above the natural rate of unemployment. Why? Increases the market for business output, increases cash-flow, improves profitability, and improves business sentiment. Where? Infrastructure, and other public goods, where private sectors is reluctant to move. Sandeep Bhaskar (Temple University) Keynesian Economics Expenditure Multipliers 6 / 26 The Model Aggregate Demand Households’ Demand: Consumption. Firms’ Demand: Investment. Government’s Demand: Government Expenditure. Rest of the World’s Demand: Net Exports. Sandeep Bhaskar (Temple University) Keynesian Economics Expenditure Multipliers 7 / 26 The Model Changes in Aggregate Demand Consumption and Imports depend on income in the given period....
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This note was uploaded on 05/04/2011 for the course ECON 1101 taught by Professor Rappoport during the Fall '08 term at Temple.

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keynesian - Keynesian Economics Expenditure Multipliers...

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