The Joy of Economics: Understanding the Expenditure Multiplier in Keynesian Economics

What is the concept of the expenditure multiplier in Keynesian economics?

Is the change in spending in the country of Torania from $13000 to $12800 an example that supports the rule of the expenditure multiplier?

Answer:

The expenditure multiplier in this example is 3. However, does this example actually support the rule of the expenditure multiplier from Keynesian economics?

The expenditure multiplier is a concept in Keynesian economics that explains how a change in autonomous spending leads to a larger change in national income and output. It is calculated using the formula 1/(1-MPC), where MPC represents the marginal propensity to consume.

In the case of the country of Torania, the change in spending from $13000 to $12800 resulted in a change in income of $-150. Despite the expenditure multiplier being calculated at 3, this example does not actually support the rule of the expenditure multiplier from Keynesian economics.

According to Keynesian economics, an increase in spending should lead to a multiplied increase in income and output. However, in this scenario, the decrease in spending led to a decrease in income, which contradicts the rule of the expenditure multiplier.