If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

## Macroeconomics

### Course: Macroeconomics>Unit 7

Lesson 2: The Keynesian cross

# Keynesian cross and the multiplier

More on shifting aggregate planned expenditures. Connecting to the multiplier. Created by Sal Khan.

## Want to join the conversation?

• Is it possible for MPC to be equal to 100%? With credit so widely used, many people spend more than their disposable income. Averaging this with those who spend a substantial portion of their disposable income could bring MPC to 100%. If this happens, then the multiplier (1/(1-MPC)) becomes infinite and then Y increases infinity for any increase in government spending or reduction in taxation. What happens in the real economy that corresponds to this singularity in the model?
• Your proposed multiplier of (1/(1-MPC)) is the result of a very simplified model that has no leakages. In more sophisticated models, there are many more behaviors that are modeled with additional equations, and those equations introduce leakages into the multiplier that is derived as the rate of change dY/dX, where Y is equilibrium GDP and X is some component of spending such as Government Spending or Investment Spending. Those leakages cause the 'sophisticated' multiplier to be much lower than (1/(1-MPC)) would suggest. You are asking a question that is best answered by looking at an Intermediate Macro textbook in the IS/LM chapters. For real world estimation of Government Spending Multipliers, see a useful blog with research citations at http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html
• In this equation goverment spending and tax rate are assumed in constant b, but in the earlier videos we have seen that by govt spending our multiplier is suppose 2.5 than multiplier by reducing tax will be 1 less than that, it should be 1.5, but here both are coming under same constant so what should we assume for our multiplier if govt increase their spending as well as reduce taxes?
• how can i derive a saving function from a keynesian consumption function
(1 vote)
• The MPC (marginal propensity to consume) + MPS (marginal propensity to save) = 1

The Savings function would be the negative of Autonomous consumption (C sub 0) plus the MPS times disposable income (Y-T)
Where Autonomous consumption = 500 :
C= 500+Mpc(Y-T)
S= -500+Mps(Y-T)
• In the video it assumes that the increase of government spending/decrease in taxes isn't going to affect the inflation in the economy. It seems to me that in normal economic times the increase in GDP could affect inflation? I realise that this doesn't really make sense, because obviously increased GDP doesn't increase inflation, but I was wondering why this was the case?
(1 vote)
• An increase in government spending does tend to increase inflation. However, if the government increases spending when it is supposed to, the inflation rate would be rather low, and can be increased without harm.
• I wonder if it is possible to show a full example uniting the Fiscal concepts (aggregate demand moving with tax cuts or government spending) and Monetary concepts (money supply and interest rates). Maybe throw in some hypothetical numbers for GDP(Y), C, I, G, NX, interest rates, money supply and MPC at a given (arbitrary) P (price level). I am just having a hard time understanding who has the greatest lever: Central Bank (adding to the money supply) or Government (by increasing spending). As a follow up question: when government spends more through deficits, it has to borrow money. In that sense, the money supply would go up because the Central Bank would buy those dollars. Fiscal lever is pulling interest rates up as government spending pushes aggregate demand, on the other hand, additional money supply should drive interest rates down.... Who wins? Can we work with some hypotetical numbers to see how the curves behave? Thanks!
(1 vote)
• To ask whether the Central Bank or the Government has a bigger lever sounds like asking `who's the better athlete: the world's best tennis player of the world's best soccer player. Both levers are powerful, but I have no idea how to compare them. There is one big difference between the levers: the one of the Central Bank is well oiled while the one of the Government is rusty. Only hours after 911 the FED decided to lower interest rates. Congress was once still passing legislation in May 1977 to deal with the recession that ended in March 1975.
(1 vote)
• If it is an open economy, doesn't the marginal propensity to withdraw include marginal propensity to save, marginal propensity to tax and marginal propensity to import? So can we say that the multiplier is equal to 1 over just MPS?
(1 vote)
• Actually, the basic multiplier is (Initial Spending)/(1–t·MPC), where t is the tax rate. However, if you factor in government revenue, it turns out to be (Initial spending)/(1-MPC).
(1 vote)
• What do you mean by planned expenditure?
(1 vote)
• In my Macroeconomics class we actually call this the Demand. Planned Expenditure, in this context, I believe it's the variable of how much the economy will spend. That means private consumption, investment and government spending.
(1 vote)
• Based on the formula Y = b/(1 - c1), with b being the sum of (c0 - c1xT + G + I + NX), I wonder if I goes down as the government cuts down on Tax - putting more money on people and firms' hands allow for greater spending and less saving which leads to less Investment. How would you compare, or evaluate, the relation between the rate of rise in b and the rate of fall in I ? This question is made with the assumption that Tax Cuts might not be a good idea, with b insignificantly going up while markedly lower level of Investment prevents the economy from shifting Aggregate Output to the right. In that case, Inflation takes place and worsens the situation.
(1 vote)
• It looks like changing taxes has a double multiplier effect?? A multiplier effect on consumption as a result of lower taxes. In addition the lower taxes has a multiplier effect on change in aggregate output? a multiple multiplier effect in you will?
(1 vote)
• Is there any difference between multiplier and investment multiplier
(1 vote)