Wednesday 18 January 2012

Exogenous changes in G

Here's an example of the Keynesian Multiplier being used to analyze real world problems. Right now, governments are trying to cut their spending on goods and services (G), or at least, restrict G's growth. Stiglitz says that given stagnant growth, governments should be doing the opposite. You will also hear similar arguments from Paul Krugman, which he makes pretty much every minute of every day on his blog or Twitter.

Also consider the current government's plans to spend £30bn on a new High Speed Rail Network (HS2) and their consideration of a new airport for London. These are all 'pro-growth' policies, partly because of the Keynesian Multiplier. The government will pay construction companies who will receive income, they will spend some proportion of that income on other goods and services, that spending will be received by others as income, those people will then spend a proportion of that money on goods and services etc etc etc

You shouldn't necessarily take this as proof that Krugman, Stiglitz or Keynes are correct. I'm posting this so you can see that what you are learning right now has a direct application to real world problems and so that you can see the sort of language that economists use when discussing these models.

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