The macroeconomic concept of the multiplier economics essay

Therefore, in the developed capitalist economies ridden with depression increase in investment leading to successive rounds of consumption expenditure raises aggregate demand.

MPC is the amount of the Bhat Thai citizens spend after saving. But this may or may not happen.

Keynes’ Theory of Investment Multiplier (With Diagram)

The negative relationship between interest rate and output is known as the IS curve. But the supply of agricultural products is inelastic because their production is subject to uncertain natural factors like monsoon and climate and further there was lack of irrigation facilities, improved seeds, fertilizers etc.

No doubt, if the Government expenditure increases by an amount equal to the taxation, it would not have any adverse effect on the increases in income and investment and in this way there would be no leakage in the multiplier process.

However, this explanation did not prove to be valid. Therefore, the slope of the curve C of marginal propensity to consume curve C has been taken to be equal to 0. Diagrammatic Representation of Multiplier: Assuming real money demand depends positively on the amount of real transacting Y and negatively on the opportunity cost of holding money r, the LM is an upward sloping curve, with steepness depending on how sensitive real money demand is to changes in r.

On the other hand, they claimed that in underdeveloped countries there was little excess capacity in consumer goods industries and therefore supply of output was inelastic.

The multiplier

Thus with the upward sloping short-run aggregate supply curve SAS, the effect of increase in autonomous investment expenditure or for that matter increase in any other autonomous expenditure such as Government expenditure, net exports, autonomous consumption on the GNP level can be visualized to occur in two stages.

Now, the question is why the increase in income is many times more than the initial increase in investment. As a result, consumption expenditure declines due to this wealth effect.

Keynes treated investment as autonomous of income and we will here follow him. Multiplier with Changes in Price Level: Now suppose autonomous investment expenditure which is independent of changes in price level increases by AI.

In view of the earlier economists these assumptions for realizing the multiplier effect in terms of rise in real income and employment were not valid in case of under developed countries.

The essence of multiplier is that total increase in income, output or employment is manifold the original increase in investment. In this figure C represents marginal propensity to consume.

In our above analysis of the multiplier process we have taken a closed economy, that is, we have not taken into account imports and exports. It will be seen from Fig.Post-Keynesian economists fundamentally used ideas from Keynes and his concept of effective demand, Marxist economist Michael Kalecki to provide a critique of neo-classical economics beliefs and an alternative theory of markets.

AS Economics Revision WorkSheet consequences of this for macroeconomic policy objectives in both the short and long run. [use the space below to jot down your answer plan] Evaluate, using the concept of the multiplier, the likely effects on.

Despite many shortcomings, the IS-LM model has been one of the main tools for macroeconomic teaching and policy analysis. The IS-LM model describes the aggregate demand of the economy using the relationship between output and interest rates.

IS-LM Model

ADVERTISEMENTS: The below mentioned article provides a complete guide to Keynes’ theory of investment multiplier. The Concept of Investment Multiplier: The theory of multiplier occupies an important place in the modern theory of income and employment.

Keynes’ Theory of Investment Multiplier (With Diagram) Article Shared by.

The Theory of Multiplier: Concept, Derivation, Calculation and Assumptions

In macroeconomics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable. For example, suppose variable x changes by 1 unit, which causes another variable y to change by M units.

Then the multiplier is M. Of critical importance to the macroeconomic concept of the multiplier, is the central bank's decision to lower interest rates and to intervene in the baht/dollar exchange rate- this is related to monetary policy- and the accompanying Thai Government's fiscal policy to expedite and increase public spending (Bhanupongp.

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The macroeconomic concept of the multiplier economics essay
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