Open Access Letter

Government deficit and “The World’s smallest macroeconomic model” by Paul Krugman

by Yasuhito Tanaka a,* orcid
a
Faculty of Economics, Doshisha University, Kyoto, Japan
*
Author to whom correspondence should be addressed.
FEL  2023, 10; 2(1), 10; https://doi.org/10.58567/fel02010005
Received: 9 August 2023 / Accepted: 11 August 2023 / Published Online: 14 September 2023
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Abstract

In his "The World’s smallest macroeconomic model” (Krugman (1999)), Paul Krugman argued that under the assumption of price rigidity, a shortage of money supply leads to underemployment or recession, so increasing money supply can eliminate underemployment and restore full employment. But, how do we increase the money supply? I will show that we need a government deficit to increase the money supply in order to restore full employment from recession. Also, I will show that in a growing economy, if people hold money, a government deficit is necessary to maintain full employment under constant price or inflation. A government deficit is not only effective in pulling the economy out of recession, it is even necessary for continued growth without inviting either recession or inflation. The government deficit in this paper represents the difference between government expenditures and government revenues. When the difference is positive, we say that the government has a deficit. This paper seeks to explore theoretically and normatively the role of government deficits in achieving and maintaining full employment in a growing economy without causing inflation, using a very simple model by Krugman.

Keywords: Budget deficit; Full employment; Price rigidity; Growth;
Copyright: © 2023 by Tanaka. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

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ACS Style
Tanaka, Y. Government deficit and “The World’s smallest macroeconomic model” by Paul Krugman. Financial Economics Letters, 2023, 2, 10. https://doi.org/10.58567/fel02010005
AMA Style
Tanaka Y. Government deficit and “The World’s smallest macroeconomic model” by Paul Krugman. Financial Economics Letters; 2023, 2(1):10. https://doi.org/10.58567/fel02010005
Chicago/Turabian Style
Tanaka, Yasuhito 2023. "Government deficit and “The World’s smallest macroeconomic model” by Paul Krugman" Financial Economics Letters 2, no.1:10. https://doi.org/10.58567/fel02010005
APA style
Tanaka, Y. (2023). Government deficit and “The World’s smallest macroeconomic model” by Paul Krugman. Financial Economics Letters, 2(1), 10. https://doi.org/10.58567/fel02010005

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References

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