Keynesian multiplier? (seconded.)

Discussion in 'Economy' started by Norman, May 16, 2011.

  1. Norman
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    Norman Gold Member

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    Ok, so this multiplier effect that is defined as 1/(1-c) for government spending and X c for tax cuts... Of course like all keynesian economics it's really abstract and the C can not be known.

    Anyway I just don't get it how it would work even if you knew c (and mind you I am talking about increasing aggregate demand, not if it's good or not).

    This is because sure you can calculate the multiplier, but the multiplier effect should be calculated against what would have other wise happened. The model considers just crowding out effect...

    So for example if you increase government spending, you can't just calculate the multiplier, you also would have to take the multiplier that otherwise would have happened had you not taxed the money away, same goes for decreasing taxes.

    I just don't get it, how does it make any sense to say moving money from one pocket to other, and then calculating only the multiplier of the 2nd pocket and not calculating the multiplier that would have happened in the first pocket, make sense?

    So shouldn't the multiplier be calculated as: A (the demand after tax breaks or government spending) - B (the demand before it).

    Any explanation for this?

    I do understand that if you print money then you can get a real multiplier... But it makes sense because printing money means more money and higher inflation expectations, which means more demand for stuff and less demand for moneys.
     
    Last edited: May 16, 2011
  2. 8537
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    8537 Senior Member

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    The Keynesian multiplier for government spending is based on borrowing from sources with zero velocity.
     
  3. Norman
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    Norman Gold Member

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    Uh ok..

    Thanks.

    I wonder though how such source could exist. Only reason to have money is to spend it.....

    Anyway this sure explains.
     
  4. Norman
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    Norman Gold Member

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    Hey one more thing for someone educated in this mumbo jumbo.

    Is the multiplier the same for government buying services and handing out money?

    Because to me it seems like handing out money should have same multiplier as taxes, which would mean it would be multiplied by C. While buying services should have higher multiplier because it would directly lift demand as well.
     
  5. Publius1787
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    Publius1787 Gold Member

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    Great question. Let me get my facts straight before I reply to your question and I will show you both how it works mathematically and why it fails mathematically.
     
  6. 8537
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    8537 Senior Member

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    That would come as quite a surprise to the millions of people holding trillions of dollars of purely-liquid assets at the moment.

    But when you start from the premise that it's all "mumbo-jumbo", it's not hard to arrive at the conclusion that its mumbo-jumbo.
     
    Last edited: May 25, 2011
  7. CrusaderFrank
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    CrusaderFrank Diamond Member

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    So the 1.6E+12 deficit added how much to the US economy thanks to the multiplier?
     
  8. Midnight Marauder
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    Midnight Marauder BANNED

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    Yes how dare they hold their own money they have already paid taxes on when it was earned.

    Must...

    Confiscate




    That



    Wealth


    And spread it around! :lmao:
     

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