Early_Business_Cycle_Models - HAKAN YILMAZKUDAY EC 601...

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HAKAN YILMAZKUDAY EC 601 ECONOMIC GROWTH LECTURE NOTES WEEK 5 THE EARLY BUSINESS CYCLE MODELS Samuelson’s (1939) paper is one of leading ones that attempts to explain the fluctuations in the economy. He has investigated the reasons for such fluctuations by referring to Alvin H. Hansen’s work on acceleration principle. He claims that this acceleration principle combined with multiplier, rather than multiplier alone, is capable of explaining business cycles. He defines the multiplier as the ratio of the total increase in the national income to the total amount of investment, governmental and private expenditure. However, this is not enough to give the relation between total national income induced by government spending and the original amount of money spent. In order to remedy this problem, he introduced acceleration principle. According to this principle, three components are added to the national income: Governmental deficit spending Private consumption expenditure induced by previous public expenditure Induced private investment is proportional to the time increase in consumption Samuelson (1939) gives a numerical example to illustrate these assumptions. He assumes that the government experiences a deficit of one dollar per period. The marginal propensity to consume α is assumed to be one-half. That is to say, the
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The Early Business Cycle Models 2 consumption of any period is equal to one-half of the national income of the previous period. And, according to the last assumption above, induced private
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Early_Business_Cycle_Models - HAKAN YILMAZKUDAY EC 601...

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