Hi I was wondering if someone could help me with the following question. To what extend if any would the absence of interest change the multiplier effect of Keynesian economics?
Assalam-u-alaikum
This is just my opinion based on the readings which I did in an hour and a half yesterday night. :-)
“In economics, a multiplier effect – or, more completely, the spending/income multiplier effect – occurs when a change in spending causes a disproportionate change in aggregate demand. The multiplier effect arises because of the induced increases in consumer spending which occur due to the increased incomes -- and because of the feedback into increasing business revenues, jobs, and income again” (Source: http://en.wikipedia.org/wiki/Multiplier_%28economics%29 )
So basically when the income of person A increases so does his/her. This leads to increase in the earning of person B and also his spendings. This leads to an increase in the earnings of person C and his spendings and so on. For example: A doctor makes more money, buys more clothes. The owner of the cloth store hence makes more money and he buys more food. The owner of the food store hence makes more money and he buys more shoes and so on.
“Decrease in the interest rate--> Increase in the quantity of money demanded--> Excess money demand--> People sell bonds-> Bond prices fall and the interest rate rises--> Excess money supply--> People buy bonds--> Bond prices rise and the interest rate falls” (Source: This was in a powerpoint presentation, I can’t find the link for it :-( ) So if we do the math this is what we may conclude. As interest rate increases, quantity for money demanded is lower. People sell bonds and this causes an increase in their income leading to increased spending. This causes a multiplier effect. Similarly, an absence of interest rate cause the same effect except that it won’t lead to increase in money supply. So in my opinion, the economy is going to adjust supply and demand of money automatically. People will be better off without interest and money will be regulated well in the economy. Employment will also increases since increased interest rates cause a decreases employement rate.
No offense Atha, but wikipedia is not the best place to reference from or use to find answers.
Its a pretty bad website, open to any laymen to write whatever they want and on many entries, there is incorrect information which they pass off as truths.
I wouldnt recommend that site for any student.
Steve: Im currently studying economics at the moment as a minor but im not partculary good at it anyways, as its my first time studying the subject. Plus i dont understand much of it lol. would love to help but Im rubbish lol.
all i would say is try looking at various journals, websites and financial newspapers to check for details regarding kenyas finances.
To be honest, theres not always a right or wrong answer, its just a matter of backing up your arguement with evidence and sources to prove your point.
An absence of interest? So that means no return for putting you money in the bank?
Well if people recieve no interest on their savings, then they will not save as much and instead consume more. Ie, spend more on domestic goods and services as well as import more.
This will cause a rise in aggregate demand as more is spent. Demand for goods go up, so supplies will start decreasing. producers will therefore increase production to meet the increased demand.
Firms will employ more ppl to meet demand. These people who are earning will then also consume and save little due to the absense of interest. The multiplier effect will get bigger and bigger.
Eventually inflation will increase.
Well its somewhere along those lines. Needs more expansion towards the end though, couldnt be bothered.
I thought I should update you all on something. My professor, Dr. Bailey who teaches economics at University of Toronto replied the following to brother Steve's question:
The multiplier would be unaffected if the interest rate dropped to zero. It depends only on income tax rates, the marginal propensity to import and the marginal propensity to consume.
Regards, LB
Jeez and I thought that interest did influence the multiplier effect. :-(
Also, Durrah, Wikepidia is recommended by school teachers in Canada. So I would say its a pretty good source. Where did you get the information you posted about Wikepidia? Did you read it somewhere or did somebody inform you about this.
No offense Atha, but wikipedia is not the best place to reference from or use to find answers.
Its a pretty bad website, open to any laymen to write whatever they want and on many entries, there is incorrect information which they pass off as truths.
Assalam-u-Alaikum
Durrah, sure Wikepidia can be edited by anyone who is using it. However, that doesn't mean that entries are not checked. I think they are checked. Take a look at this tagged entry. http://en.wikipedia.org/wiki/Tim_Glomb
Thanks for your good intentions though. Jazakallah Khair
Take care
Assalam-u-alaikum
i agree with sister atha - the majority of the articles can be edited, this is a big issue especially with islamic articles, Allaah subhanahu wa ta'aala knows best. however i dont think that sites reliable so i wouldn't prefer to use it.
Hi I was wondering if someone could help me with the following question. To what extend if any would the absence of interest change the multiplier effect of Keynesian economics?
At my Quantitatve Methods lecture the professor was saying that the "Fall of Keynesian Theory" (wrt fiscal policy dependency) came when statistics showed that it had a measly 0.06 probabilty or something like that of shaking up the economy as opposed to Milton Freeman's Monteray policy mentality which had a probability of 0.49 or something like that (don't quote me on the numbers but i can tell u that Monetary policy definatley atleast had more than a 20 fold effect on the economy compared to Fiscal)
ill ask my friend for the lecture notes if he's still got them n ill get back 2u with the exact figures.
One of the politicians actually labelled it "a beautiful set of numbers" lol.
Based on that... it makes sense that the Multiplier effect would undergo a relatively bigger change if interest rates are adjusted compared to contracting or expanding government spending.
From the outset it might seem that "interest is the way to go", but there's a tonne of underlying dynamics which can be influenced to make up, going down all teh way to the currency used in the economy (hint hint, gold stadnard)
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