24. Determination of national income equilibrium in the Keynesian analysis. The multiplier effect and multiplier coefficient.
Determination of Y
Equilibrioum level-is a situation where there is no tendency to change.
2 ways of finding Ye:
1.W=J (S-I)
2.Y=E, Cd+W=Cd+J
Equil of Y doesn’t mean unchanges in Y.Keynes argues that changes in J,W and E including Cd lead to multiplied changes.
1.Inj multplier-the number of times by which a rise in income exceeds the rise in J that caused it:k=∆Y/∆J
2.W multiplier- #of times by which a rise in Y exceed the decrease in W that caused it=∆Y/∆W
The flatter the W function → the less is mpw, the greater k.
3.Expenditure approach-#of times by which the rise in Yexceed the rise in E=∆Y/∆E
The greater mpc (which determ Cd) the greater is k.
Multiplier coef(k)=1/mpw=1/(1-mpc).
The logical expl of mult effect :
1.spending for 1 person is alwats income for others
2.spending of 1 person causes spendings of others
Conclusions from theory:
1. ↑C/↑E → ↑Y→ faster ec. growth, higher living standard.2. ↑S/↑W→ ↓Y→ slower ec. growth, lower living standard .Keynes formulated the paradox of thrift: ↑S→ ↑W→ ↓Y(multi)→ ↓S(in future)
If individuals save more, they will increase their consumption possibilities in the future. If society saves more, this may reduce its future income and C. As people save more, they will spend less. Firms will thus produce less. There will thus be a multiplied fall in income. The phenomenon of higher saving leading to lower national income is known as ‘the paradox of thrift’. But this not at all. Far from the extra S encouraging more I, the lower cons will discourage firms from investing. If I falls, the J line will shift downwards. There will then be a further multiplied fall in Y.
25. Keynesian explanation of inflation and business fluctuations.
26. Fiscal policy: types and effectiveness.
Fiscal policy is a policy is a policy to affect aggregate demand by altering the balance between government expenditure and taxation.
Automatic fiscal stabilizers are tax revenues that rise and benefits that fall as national income rises. They have the effect of reducing the size of the multiplier and thus reducing cyclical upswings and downswings.
Automatic stabilizers take effect as soon as aggregate demand fluctuates, but they can never remove fluctuations completely. They also create disincentives and act as a drag on recovery from recession.
Discretionary fiscal policy is where the government deliberately changes taxes or government expenditure in order to alter the level of aggregate demand. Changes in government expenditure on goods and services have a full multiplier effect. Changes in taxes and benefits, however, have a smaller multiplier effect as some of the tax/benefit changes merely affect other withdrawals and thus have a smaller net effect on consumption of domestic product. The tax multiplier has a value 1 less than the full multiplier. There are problems in predicting the magnitude of the effects of discretionary fiscal policy.
Expansionary fiscal policy can act as a pump primer and stimulate increased private expenditure, or it can crowd out private expenditure. The extent to which it acts as a pump primer depends crucially on business confidence – something that is very difficult to predict beyond a few weeks or months. The extent of crowding out depends on monetary conditions and the government’s monetary policy.
Pure fiscal policy does not involve any change in money supply.