The Economics Book

164

GOVERNMENT SPENDING

BOOSTS THE ECONOMY

BY MORE THAN

WHAT IS SPENT

THE KEYNESIAN MULTIPLIER

Government spending

boosts the economy by

more than what is spent.

IN CONTEXT

FOCUS

The macroeconomy

KEY THINKER

John Maynard Keynes

(1883–1946)

BEFORE

1931 British economist

Richard Kahn sets out an

explicit theory to explain

the multiplying effects

of government spending

suggested by John

Maynard Keynes.

AFTER

1971 Polish economist Michal

Kalecki further develops the

notion of the multiplier.

1974 US economist Robert

Barro revives the idea of

“Ricardian equivalence” (that

people alter their behavior to

adjust to government budget

shifts). This implies there are

no multiplier effects from

government spending.

If the government increases

spending during a recession

(by building new infrastructure,

for example), it will...

This spending will

increase demand and...

... save some of their income,

and spend the rest.

... create employment.

The newly employed

workers will...