Keynesian Multiplier Effect
The Keynesian multiplier effect is an economic concept that explains how an initial increase in spending can lead to a larger increase in total national income. It is based on the idea that when a person or business spends money, that money is then re-spent by the people or businesses that receive it, creating a multiplier effect. This effect is named after the British economist John Maynard Keynes, who first proposed it in his 1936 book The General Theory of Employment, Interest and Money.
The Keynesian multiplier effect works by increasing the demand for goods and services. When a person or business spends money, the money is then re-spent by the people or businesses that receive it. This creates a ripple effect, as the money is re-spent multiple times. This increased demand leads to increased production, which in turn leads to increased employment and income. This increased income then leads to further spending, creating a multiplier effect.
The size of the multiplier effect depends on the marginal propensity to consume (MPC). The MPC is the proportion of an increase in income that is spent on consumption. The higher the MPC, the larger the multiplier effect. For example, if the MPC is 0.8, then for every $1 increase in spending, there will be an $8 increase in total national income.
History of the Keynesian Multiplier Effect
The Keynesian multiplier effect was first proposed by British economist John Maynard Keynes in his 1936 book The General Theory of Employment, Interest and Money. In the book, Keynes argued that an increase in spending would lead to a larger increase in total national income. He argued that this effect was due to the fact that when a person or business spends money, that money is then re-spent by the people or businesses that receive it, creating a multiplier effect.
Keynes’ theory was initially met with skepticism, but it eventually gained acceptance among economists. Today, the Keynesian multiplier effect is widely accepted as a valid economic concept. It is used by governments and central banks to help manage economic growth and inflation.
Comparison Table
| MPC | Multiplier Effect |
|---|---|
| 0.2 | 5 |
| 0.4 | 2.5 |
| 0.6 | 1.67 |
| 0.8 | 1.25 |
Summary
The Keynesian multiplier effect is an economic concept that explains how an initial increase in spending can lead to a larger increase in total national income. It is based on the idea that when a person or business spends money, that money is then re-spent by the people or businesses that receive it, creating a multiplier effect. The size of the multiplier effect depends on the marginal propensity to consume (MPC). The higher the MPC, the larger the multiplier effect. For more information about the Keynesian multiplier effect, you can visit websites such as Investopedia, The Balance, and the Federal Reserve Bank of St. Louis.
See Also
- Marginal Propensity to Consume (MPC)
- Marginal Propensity to Save (MPS)
- Autonomous Consumption
- Induced Consumption
- Aggregate Demand
- Aggregate Supply
- Inflation
- Deflation
- Gross Domestic Product (GDP)
- Monetary Policy
