Extending the Simple Keynesian Model

The Simple Keynesian Model, discussed in the previous two chapters, may not seem very well named -- it is complicated enough! And yet the real world is much more complicated, and there is much that was left out of that model that we need to take account of. In particular, government is still left out of the picture -- and that's particularly important, because a major purpose of the Simple Keynesian Model has been to understand the impacts of government spending and taxation on employment and production. Accordingly, in this chapter, we will try to extend the Simple Keynesian Model to take account of:

• Government purchases
• Taxes
• Government Budgetary Policy
• Fiscal Policy Against Inflation and Recession
• The Government Deficit

1. The consumption function: Consumption depends on income but increases less than proportionately when income increases.
2. We have equilibrium when total spending equals total income, i.e. Y=C+I+G+NX
3. In this chapter we will again assume trade balance, i.e. NX=0.
4. The model can be illustrated by a diagram that plots income and the components of expenditure.

Government Purchases