John Maynard Keynes Multiplier Effect - 1603 Words

John Maynard Keynes: Multiplier Effect In 1931, a British economist named Richard Kahn introduced what is known as the multiplier effect. In Kahn’s article, â€Å"The Relation of Home Investment to Unemployment†, he first introduced the multiplier effect which in turn ended up being his most notable contribution to the field of economics (Richard Kahn, Baron Kahn.). The multiplier effect can be defined as how aggregate expenditure, for example government spending, causes an increase in output. According to Investopedia, the multiplier effect showed that any type of government spending results in cycles that increase employment and prosperity, no matter what kind of spending it is Beattie, Andrew). With that being said, how much money should†¦show more content†¦Although Keynes passed away in 1946, he is considered arguably the most influential economist of the 20th century and event today we continue to see some economic ideas originated from Keynes. The primary concept surrounding the multiplier is that once money is filtered into the economy, people will continue to spend that money. Theoretically, if people saved no money, by Keynesian Economics, the economy would be a perfect, unstoppable engine running at full employment (Beattie, Andrew). Unfortunately, people do save money and the economy isn’t perfect. Keynesians argued that the more that the government can get people to spend all of the income, the closer to perfection the economy would be. With that being said, Keynesians attempted to counteract savings by taxing savings. This would ultimately cause more people to spend their money rather than save it, because why would people save if they have to pay to save? Keynes’ defined the multiplier to be 1/(1-MPC), where MPC stands for the Marginal Propensity to Consume. Although, what does â€Å"Marginal Propensity to Consume† mean? When a person gets money, let’s say $500, the person will either spend that money or save that money. The rate of how much the person spends is the Marginal Propensity to Consume. So, if the person spends $450, that means that essentially they save $50, because it is assumed that all of the money is going towardsShow MoreRelatedClassical and Neoclassical Economists: Adam Smith and John Maynard Keynes1289 Words   |  6 Pagesto the classical economists and the neoclassical economists. The two most influential economists that helped to shape our economy with their thoughts and theories that are still used in modern economy are Adam Smith a classical economist and John Maynard Keynes a neoclassical economist. These two economists are the most famous economists of all times. 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He proposedRead MoreThe Marginal Propensity Of Consume762 Words   |  4 Pagescannot spend more than the extra dollar. According to John Maynard Keynes (1936), marginal propensity to consume is less than one. The Multiplier MPC s importance depends on the multiplier theory. MPC determines the value of the multiplier. The higher the MPC, the higher the multiplier and vice versa. A small change in the aggregate demand initially can give a final wide change in the national income. This is considered as the multiplier effect and due to this change in demand it would give a circularRead MoreKayne vs Hayek1370 Words   |  6 PagesChanya Udomphorn ID# 5380040 Macroeconomics Mr. Rattakarn Komonrat Keynes vs. Hayek Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. 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This belief transpired because of the Wall Street Crash of 1929 and the subsequent depression that highlighted the shortcomingsRead MoreIS, LM model and explanations(in the form of an essay).1350 Words   |  6 PagesIntroduction: During the years after World War II, the development of the IS-LM model took several directions. Probably, the most prominent ideas on that theory were expressed in the work of John Hicks called Mr. Keynes and the Classics. The model expressed in the article was largely based on the works of John Maynard Keynes and became a widely accepted as the alternative framework to standard Keynesian analysis. The IS-LM model is a way of modelling equilibrium in the economy by looking at equilibrium in