Question

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy: changes income, which changes consumption, which further changes income. is government spending and, therefore, more powerful than private spending. changes the interest rate. increases the amount of money in the economy.

Answer 1

Answer:

Explanation:

Keynesian Economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions.

Keynes developed his theories in response to the Great Depression, and was highly critical of classical economic arguments that natural economic forces and incentives would be sufficient to help the economy recover.

Activist fiscal and monetary policy are the primary tools recommended by Keynesian economists to manage the economy and fight unemployment.

Answer 2

Answer:

changes income, which changes consumption, which further changes income.

Explanation:

Keynesian theory states that low aggregate demand results in low income and high unemployment. Mathematically, actual expenditures must equal GDP, and planned expenditures = consumption expenditures, planned investment and government spending. Actual expenditures should vary only because of unplanned inventory investment = unsold finished products.

Keynesian models focus on increasing total expenditure and one way to do achieve this is by an expansionary fiscal policy. If aggregate income increases, total consumption will increase, and it will result in a further increase in aggregate income which will again increase consumption ⇒ It results in a virtuous cycle.

Keynes's great success was based on increasing aggregate demand while keeping a strict monetary policy in order to keep inflation low. High inflation dilutes the gains of an increase in aggregate demand.