Question

What is the significance of the Keynesian expenditure multiplier?

Thinking back to the business cycle and the circular flow models, how would Keynesian economists explain the performance of the economy since March 2020?

Answer 1

The keynesian expenditure multiplier says that initial rise in the government expenditure would lead to the multiple rise in the income level. The spending by the one entity is income of another entity, thus when investment or government expenditure rises, there will be a multiple rise in the income level.

The multiplier value depends on the marginal propensity to consume MPC.

The COVID-19 pandemic has led to the decline in the aggregate demand, and through multiplier effect, the total impact on the GDP is larger, thus keynesian economics says that such recessionary gap caused by the fall in the aggregate demand, can be corrected through the rise in the expenditure level. the rise in the expenditure would cause the multiple rise in the income level. Thus recessionary gap would be filled up.