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part either of those who lend funds to the government, or of those who would otherwise have borrowed the funds. How much of the rise in expenditures will be offset? This depends on the holders of money. The extreme assumption, implicit in a rigid quantity theory of money, is that the amount of money people want to hold depends, on the average, only on their income and not on the rate of return that they can get on bonds and similar securities. In this case, since the total stock of money is the same before and after, the total money income will also have to be the same in order to make people just satisfied to hold that money stock. This means that interest rates will have to rise enough to choke off an amount of private spending exactly equal to the increased public expenditure. In this extreme case, there is no sense at all in which the government expenditures are expansionary. Not even money income goes up, let alone real income. All that happens is that government expenditures go up and private expenditures down. |
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I warn the reader that this is a highly simplified analysis. A full analysis would require a lengthy textbook. But even this simplified analysis is enough to demonstrate that any result is possible between a $ 300 rise in income and a zero rise. The more stubborn consumers are with respect to how much they will spend on consumption out of a given income, and the more stubborn purchasers of capital goods are with respect to how much they will spend on such goods regardless of cost, the nearer the result will be to the Keynesian extreme of a $ 300 rise. On the other side, the more stubborn money holders are with respect to the ratio they wish to maintain between their cash balances and their income, the closer the result will be to the rigid quantity theory extreme of no change in income. In which of these respects the public is more stubborn is an empirical question to be judged from the factual evidence, not something that can be determined by reason alone. |
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Before the Great Depression of the 1930's, the bulk of economists would unquestionably have concluded that the result would be nearer to no rise in income than to a $ 300 rise. Since then, the bulk of economists would unquestionably conclude the opposite. More recently, there has been a movement back |
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