Macroeconomics Theories and Policies
Quiz 6 :
Keynesian System I
With b=0.80,the multiplier is equal to 1/(1 - b)=4.Then,an increase in investment of $500 billion increases equilibrium income by $2 trillion.If b = .8 then the multiplier is 5 and income would increase by $2.5 trillion.
An increase in government spending financed with bonds or a decrease in taxes financed with bonds would increase the budget deficit and drive up interest rates.These changes in fiscal policy would also increase aggregate income.
The price level and interest rates are fixed in this model.This is justified by the fact that this model is focused on the very short-run and as a result can be treated as constant.