Derivation of multiplier

Derivation of multiplier - employment condition? Keynes has...

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Derivation of multiplier: Keynes has established that deficiency in the effective demand as a cause of unemployment, is a result of the typical nature of consumers who display the propensity to consume . However, like classical economists he does not argue that such deficient effective demand can be compensated by an equivalent increase in private investment expenditure. Such investment spending (I) is also known as induced investment since it is induced by the profit motives of the entrepreneurs. With a fall in the value of propensity to consume and depressed demand for consumption goods it is more likely that investment expenditure will either remain constant or may even decline, but it cannot rise to compensate for deficiency . It is obvious that falling demand and sluggish market conditions will result in lower profit expectations. The producer therefore will certainly not create fresh investment demand under the conditions of declining consumption demand. Here an important question arises: how can one correct the
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Unformatted text preview: employment condition? Keynes has suggested that public authority should undertake public expenditure or an investment program (G) to correct the level of effective demand and to restore the level of employment. Since public investment activity is not motivated by the profit consideration, it is called autonomous investment . With the inclusion of G the income equation can be rewritten as follows: Y = C + I + G However, the size of the autonomous investment G need not be as large as the original gap between income and consumption (Y - C) expenditure. Even the small size of the public expenditure can significantly raise the level of effective demand. This is because of the presence of the multiplier. Keynes has made an important use of the multiplier operation. Let’s illustrate a multiplier. Given the two equations of income and consumption function the multiplier is present implicitly. Y = C + I and C = by (on substitution), Y = by + I...
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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Derivation of multiplier - employment condition? Keynes has...

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