Question

During the period of the "Great Moderation" (the mid-1980s through the mid-2000s), discussion of the Keynesian expenditure multiplier had largely gone out of fashion. After all, if business cycles were largely tamed, the effects of a significant demand shock seemed irrelevant. When the Great Recession hit at the end of 2007, the expenditure multiplier became a hot topic again for discussion among macroeconomists. Why does the size of the expenditure multiplier matter in the real world? Why does it matter to businesses, employees, consumers and policy makers? Based on what you know about the multiplier, do you think the government took the appropriate response to the Great Recession? Was the fiscal stimulus response to the recession enough, just right, or too much?

150 words

Answer 1

Apart from Great depression, the concept of fiscal measures have its own relevance in the real world economy. From a development prospective, business to flourish, there has to be first a social overhead capital, which need a bounty of investments in basic services by the government taking suitable fiscal measures. In the context of great depression, Keynes suggested it as a short run instant stimulus to stamp out the economy from a depression where employment and price are happened to be so low. As every economic agents get affected during the depression, the instant solution lies in the multiple effect of fiscal investment on economy through change in income and causing raising employment and price level. During great recession, there has been taken right amount of policy measures. Government adopted a blend of public expenditure and tax cut to revive the economy in order to boost effective demand and use full capacity of the economy. Once the full capacity of the economy is used and deficient demand is driven out of the economy, the economy got out of the recession. Thank you