It's a good idea to pause every now and then and ask: What is the point of all this? Where is it going? (As long as there is an answer, the Prof won't mind).
In Keynesian macroeconomics, the point is unemployment. Understanding unemployment as an excess supply of labor, and considering unemployment as a social problem, the point is 1) to understand how such a problem can arise in a market economy, and 2) to suggest how the problem might be solved or made less serious. Up until now we have been concerned with diagnosis -- how can the problem arise? But we have come to a point at which we can prescribe. The prescription will, of course, be very tentative and preliminary -- we may want to change it as we learn more. But we can see something that might be done.
The prescription is addressed to the national government. Keynesian economics understands unemployment as a macroeconomic problem, a problem of the economic system as a whole, so it must be addressed by the one agency that can have an impact on the economic system as a whole: the national government.
What we have just seen is that a change in government purchases of goods and services can influence the equilibrium income in the model economy. An increase in income would mean (ceteris paribus) that more people would be employed to produce the income. So it could make sense for the government to spend more money in order to stimulate production.
A program of public works, for example, could hire the unemployed to build new roads, parks and camps and public buildings, and even interview old people and write the local history of their communities. The Works Progress Administration did all of these things in the U. S. in the 1930's. (In its recession of the 1990's, Japan, too, turned to public works to increase income.) By hiring the unemployed, such a public works program would make the people it hired better off; but it would do more than that. It would have a multiplier effect. The people hired for the public works would spend most of their income, and that would create income for still other people, who would in turn spend most of their income and create still more income for still other people. That's the way the multiplier works. And, so long as the new income is being produced by people and resources that would otherwise be unemployed, it's a no-lose situation -- no other goods and services need be sacrificed in order to increase the incomes of the formerly unemployed. (At least, that's the way it would work in the Keynesian model economy. The real world is, as always, more complex and frustrating).
Public works projects designed to increase employment would be an example of "fiscal policy."
A Numerical Example
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