Re-specifying the Keynesian Income-Expenditure Model

February 3, 2009

The paper provides a modification of the standard textbook income – expenditure model that better accounts for the effect of imports.

This modification shows that increased government spending has an even larger relative impact compared to tax cuts than is conventionally thought. It also shows that increased government spending can have a smaller adverse impact on the trade deficit than tax cuts despite the fact spending has a larger multiplier effect on income. That means spending may be doubly advantaged over tax cuts as a means of reflating economic activity.

Authors: Thomas Palley
Download PDF