Chapter Summary

In a model of the market economy as Keynes conceived it, changes in "autonomous spending" can shift the equilibrium income and so change the level of production and employment. Any of the three components of autonomous spending,

autonomous consumption
investment, and
net exports

can have this sort of effect. In each case, the change in equilibrium income will be of a different magnitude than that of the autonomous spending component, and will usually be larger than the change in the autonomous spending component. This is expressed by the autonomous spending multiplier,

The model we are considering here remains too simple for practical application, though. Its purpose is really to illustrate how a model of equilibrium unemployment might work, and to illustrate some of the effects that could enter into the determination of employment in the real world. The student should remember that such things as the constant marginal propensity to consume of 0.7 and the multiplier of 3.33 are not facts, but illustrative examples. There are other effects in the real world, some of which will tend to offset the ones we have considered here.

We will look at some of them in the next two chapters. The next step will be to explore the impacts of government spending and taxation, and then we will bring interest rates and the money supply into the Keynesian model.

Next Chapter: Fiscal Policy and the Simple Keynesian Model

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