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The Keynesian Multiplier Fairy Tale

The Keynesian Multiplier Fairy Tale
U.S. Treasury Assistant Secretary Harry Dexter White (L) and John Maynard Keynes, honorary adviser to the UK Treasury, at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Ga., on March 8, 1946. IMF
Frank Shostak
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Commentary
Many incorrectly assume that the overall economy’s output increases by a multiple of the increase in expenditure by government, consumers, and businesses. For instance, if out of an additional dollar received individuals spend $0.90 and save $0.10, then if consumers spending were to increase by $100 million, it is held that the overall output in the economy is going to increase by the tenfold of the increase in consumers’ expenditure (i.e., by $1 billion). The following example provides the reasoning behind this way of thinking.
Frank Shostak
Frank Shostak
Author
Frank Shostak, Ph.D., is an associated scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.