Abstract
Almost every developed country experiences serious enlargement of the scale of government, specifically the expansion of fiscal deficits. We inquire why such a phenomenon is so prominent based on a Keynesian growth model entirely compatible with a standard neoclassical microeconomics. The cost-minimizing investment plays a key role. Whenever the demand that each firm faces is constrained by the effective demand (such case includes the situation of monopolistic competition), a firm strives to raise the productivity of labor and save its production cost. Such a process incessantly continues even if the effective demand is kept intact. It also implies that the unemployment would tend to be unbounded because the labor productivity improves under the constant effective demand. As such, a ceaseless expansionary aggregate demand policy is inevitably required for sustaining explosive potentials of production.
Highlights
Almost every developed economy is bothered by the huge amount of fiscal deficit and/or accumulation of public debts
Whenever the demand that each firm faces is constrained by the effective demand, a firm strives to raise the productivity of labor and save its production cost
We have analyzed the properties of economic growth in a monetary market economy by a Keynesian growth model with a rigorous neoclassical microeconomic foundation
Summary
Almost every developed economy is bothered by the huge amount of fiscal deficit and/or accumulation of public debts. It is urgently necessary for each employer to improve the labor productivity via effective wage-cost reduction Since such an economic motive ceaselessly works independent of the level of effective demand, even if it is not a conscious consequence, it enlarges the potential production capacity economy as whole relatively to the effective demand. Since the future price level (the inverse of the purchasing power of money) affects the current price via current wage-price setting, the faith to the intrinsic value of money quite naturally leads us to endogenous current price inflexibility As such, it is a rather rare case in which the full-employment equilibrium is attained within a monetary economy.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
