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Explain the operation of the Keynesian multiplier
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Explain the operation of the Keynesian multiplier a) Explain the operation of the Keynesian multiplier The easiest way to explain the way in which the multiplier works according to Keynes is to construct a simple model. This model will have two particular simplifying features, in that it will focus exclusively on the demand side of the economy, and it will not include either government activity or the foreign sector. In order to construct this model, we will assume that all prices and wages are fixed within the economy, and that there are unemployed workers seeking jobs and firms that are not operating at their highest possible profitable capacity. From these two assumptions, it follows that the output of firms is being limited not by unavailability of labour, but demand. Firms will be producing at a level of output determined by demand. Demand in this model will come from two sectors, namely...
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