Beyond the Multiplier Model

We have completed our of the most important applications of the Keynesian multiplier model. This analysis is an indispensable aid in understanding business fluctuations and the linkage between fiscal policy and national output.

But it would be a mistake to believe you can turn a parrot into a macroeconomics by simply teaching it to say ,”C + 1+ G” or “Polly has a multiplier.” Behind such concepts are important assumptions arid qualifications.

Recall that the multiplier model assumes that investment is fixed and ignores the impact of money and credit. Remember that we .have not yet correct the interaction between the United States all  the rest of the world. Recall that aggregate supply .

left out of the story, so we have p~ way of analyzing how increases in spending are divided between and output. And these are not trifling concerns rather, they are essential to understanding modem macroeconomics. But before we can incorporate these further realistic elements, We must master monetary theory and policy, as well as the essentials of economic .growth and inflation theory.

Once we awe incorporeal rated the influence of money and interest rates, original ”The anatysa with the behavior of wages and prices, we will see that 6. multiplier the impact of fiscal policy on the economy may be quite Different from the simplest multiplier model.

We turn next to an analysis of one of the most fascinating parts of all economics: the study of money. Once we understand how the central bank determines the money supply, we will have a fuller appreciation of how governments can tame the business cycles that have run wild through much of the history of capitalism.

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