Keynes argued that government deficit spending could counteract situations in which private sector aggregate demand...
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Keynes argued that government deficit spending could counteract situations in which private sector aggregate demand was not sufficient to maintain or restore full employment.The key to this, Keynes said, was government injecting additional spending into the economy, and then relying on the marginal propensity to consume and the expenditure multiplier. Explain how Keynes argued this worked and why? Suppose that the government runs a $1,000 budget deficit, injecting that much more spending in the economy. If the marginal propensity to consume were to be, say, 80 percent, what would be the final, full increase in aggregate income in the economy? How much of it would in the form of additional consumption expenditures, and how much in the form of additional savings?
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