Expenditure Multiplier – Know the THE KEYNESIAN MODEL

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Once you go through this chapter you will be well acquainted with all the explanations related to the following conditions:

  • How the expenditure schemes are decided when the level of the price is fixed
  • When price is predetermined, how the real Gross Domestic Product is measured
  • With price being fixed, explaining the phenomenon of the expenditure multiplier
  • The change in the relationship between the total expenditure with the total demand and the change in the multiplier with there is a change is the price level.

In scarcely audible low tone Alicia Keys sings her song in the microphone which miraculously fills the entire Central Park by the electronic means of amplification.

The Mayor of the New York City – Michael Bloomberg along with his assistant, are on their way to attend a business meet when the wheel of the car bounced on the uneven road of Downtown Manhattan and vibrates. The miracle is that they don’t even feel a thing, all thanks to the proficient shock absorbers on the car.

Like the both above situations, investment as well as exports alters like the tone modulation of Alicia Keys voice and the irregular, jagged road on which the car wheel jumped. So, have you ever wondered how the economy responds to the ever changing fluctuations? Does it amplifies the effect of the change or does it tolerates the fluctuation effects in order to provide the citizens smooth ride like that of the limousine scenario given above?

In this chapter you will be learning all about these fluctuations and its consequences for the people of the economy. At the end of the chapter, under Read Between the Lines,you will get to know the part played by the inventory investment during the time of expansion of the economy, in 2010.


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