The Economist explains economics: What is the Keynesian multiplier?

Posted: September 8, 2016 in economy
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This week “The Economist explains” is given over to economics. For each of six days until Saturday this blog will publish a short explainer on a seminal idea.WHEN Barack Obama sought to boost America's ailing economy with a fiscal stimulus package worth more than $800 billion in the wake of the financial crisis of 2008, a fierce debate ensued. Some economists reckoned the spending would do little to help the economy. Others suggested it could add much more than $800 billion to GDP. These arguments centred on the value of the Keynesian multiplier, which determines by how much output changes in response to a change in government borrowing. (With a multiplier of two, for example, GDP rises by $2 when the deficit increases by $1.) The Keynesian multiplier is one of the fundamental, and most controversial concepts in macroeconomics. Where did it come from and why is there so much disagreement about it?The multiplier emerged from arguments in the 1920s and 1930s over how governments should respond to economic slumps. John Maynard Keynes, one of history's most important economists, described the role of the multiplier in detail in his seminal book, “The General Theory of Employment, Interest and Money”. Conventional wisdom had it that government borrowing raises interest rates and uses resources which might otherwise have been spent by private firms or households. Keynes …

via Economic Crisis


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