279 Reading: The Expenditure Multiplier

The Expenditure Multiplier

One of the key claims of Keynes was the existence of  an “expenditure multiplier.” Remember from previous readings that Keynes said that aggregate demand was highly volatile, that even if the economy started at a level of GDP where equaled it’s potential so that the economy was at full employment, AD could shift abruptly causing a recessionary or inflationary gap. In the Keynesian model, not only did changes in spending cause GDP to change, but the change in GDP was more than proportionate than the initial change in autonomous spending. In other words, aggregate demand is powerful since a change in spending results in a multiplied change in GDP. This spending multiplier was part of the reasoning behind the Keynesian view that fiscal policy is a powerful tool for managing the economy.

Self Check: The Expenditure Multiplier

Answer the question(s) below to see how well you understand the topics covered in the previous section. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.

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