Analysis and Synthesis

Abstract

While the subject-matter of the last chapter is fresh in the reader’s mind it is worth pointing out that we may derive the output multiplier equations for the Keynesian, New Cambridge and a fourth mainstream view, the Post-Keynesian view, as variants of the reduced-form equation (4.20) for output:

$$Y = {{G + {I_0} + X - {M_1} + \beta W} \over {\left[ {\psi + {{a\gamma} \over l}} \right]}} + {{MS/P} \over {\left[ {{{\psi l} \over a} + \gamma } \right]}}$$

Dealing first with the Keynesian and New Cambridge views, both schools argue that money and other financial assets are very close substitutes (i.e l is very large: the LM curve is nearly horizontal), while financial assets and real assets such as investment goods are not (i.e. α is very small: the IS curve is nearly vertical). Letting l→ ∞, α→ 0 in the above equation, we obtain:

$$Y = {{G + {I_0} + X - {M_1} + \beta W} \over {\left[ {1 - b\left( {1 - {t_d}} \right) + {t_i} + m} \right]}}$$

where ψ = (1 − b(1 − td) + ti, + m).