Keynesian theory is a product of the Great Depression of the 1930s. It was John Maynard Keynes' assertion that expenditure, meaning how much an economy spends on goods and services, is the key to economic stimulation.
Keynesians identify four components of expenditure:
1. Consumption, the most important component, which refers to what consumers spend;
2. Investment , which refers to what businesses spend on increasing capacity;
3. Government purchases , meaning what all levels of government buy from the private sector; and
4. Net exports , which are what the nation sells abroad, less what it buys from other nations.
Because Keynesian theory sees spending as the driver for economic growth, Keynesians consider personal savings - whatever a consumer earns but does not spend - to be a drag on the economy.
This drag is measured as the
marginal propensity to consume
(MPC), the additional consumption from an aggregate raise in pay divided by that aggregate raise in pay. The formula is simple enough:
The higher the MPC, the lower the savings rate.
Keynesians see one person's consumption as someone else's income - then someone else's, then someone else's. As a result, there is a multiplier at work that turns every dollar of individual expenditure into more dollars of national wealth.
The multiplier is the change in total income divided by the change that brought it about.
After all the algebra, it looks like this:
Multiplier = 1
1 - MPC
0701927520 answered the question on February 11, 2018 at 05:41
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