Curiosity 4.2: What Is the Multiplier?

Keynesians and their modern counterparts, New Keynesians, believe that judicious government intervention in the economy is appropriate. Classical economists (see appendix 4.1), monetarists (see chapter 9), and their modern counterparts, New Classicals, believe that government intervention is to be avoided. This issue is revived in chapter 9 when discussing the ''rules-versus-discretion" debate: Should policy authorities be permitted to enact policy as they see fit?
Media Illustrations
Example 1
All this frugality is producing a consumer-generated recession. What is needed is some policy action to stimulate consumer spending to move the economy out of its current lassitude. Consumer attitude surveys indicate that the time is ripe for such a move, and the high savings rate of recent years has led many economy watchers to predict an upturn.
What is a consumer-generated recession?
There has been a fall in consumer spending, decreasing aggregate demand and, through a contractionary multiplier process, causing a recession.
What kind of policy action could stimulate consumer spending?
A decrease in taxes could increase consumer spending.
How would stimulating consumer spending move the economy out of its current lassitude?
Stimulating consumer spending would increase aggregate demand; through a multiplier process, greater demand would move the economy to a higher level of income.
What is the relevance of consumer attitude surveys?
If consumer attitudes toward spending are negative, policy actions to increase consumer spending, along with the multiplier process that relies on higher incomes increasing consumption demand, may not work.
Why has the high savings rate of recent years led to a prediction of an upturn?
The high savings rates have increased people's wealth. Feeling wealthy, consumers may increase their spending.
Example 2
Under present circumstances there is such a thing as a "free lunch." In effect, all of the ingredients of that lunch are already there the people who want to work, the factories and equipment standing idle, and the raw materials not being used. It is just a question of injecting a little spending power to prevent the free lunch from going to waste.
What kind of government policy is this a plea for?

 



Macroeconomic Essentials. Understanding Economics in the News 2000
Macroeconomic Essentials - 2nd Edition: Understanding Economics in the News
ISBN: 0262611503
EAN: 2147483647
Year: 2004
Pages: 152

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