(Part A) Evaluate the fundamental arguments between Keynesians and Monetarists c
ID: 1192360 • Letter: #
Question
(Part A) Evaluate the fundamental arguments between Keynesians and Monetarists concerning the level of government involvement in our economy to minimize the impact and stabilize the different stages of the business cycle. (15 points) (Part B) Any change in the economy’s total expenditures would be expected to translate into a change in GDP that was larger than the initial change in spending. This phenomenon is known as the multiplier effect. Explain how the multiplier effect works. (10 points) (Part C) You are told that 90 cents out of every extra dollar pumped into the economy goes toward consumption (as opposed to saving). Estimate the GDP impact of a positive change in government spending that equals $8 billion. (15 points)
Explanation / Answer
a.The debate between Monetarist and Keynesian theories of money is often raised in times of economic recession, when productivity declines and unemployment levels rise. Keynesian economists often seek to address weak economic conditions using fiscal government stimulus -- efforts to increase government expenditure, lower taxation and invest in long-term productive output -- with the expectation that these policies will increase economic demand. Monetarists, by contrast, are more interested in increasing the supply of money available to lenders and businesses, with the expectation that easier access to credit is more effective in generating productive growth. Governments and central banks often enact policies to respond to recessions that are based to some degree in both theories of money.
b.The multiplier effect is a concept in economics that describes how an injection into an economy, such as an increase in government spending, creates a ripple effect which increases employment and the output of goods and services in the economy.
c.If consumers spend 0.9 and save 0.1 of every $8 billion of extra income, the multiplier will be:
=1/1-0.9 = 1/0.1 = 10
Hence, the multiplier is 10, which means that every $8 billion of new income generates $10 billion of extra income.
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