The impulse in the Keynesian theory of the business cycle is expected future sales and profits. A change in expected future sales and profits changes the demand for new capital and so changes the level of investment Keynes had a sophisticated theory about how expected sales and profits. A change in expected future sales and profits are determined. He reasoned that these expectations would be volatile because most of the events that shape the future are unknown and impossible to forecast.
So he reasoned, news or even rumors about future tax rate changes , interest rate changes , advances in technology , global economic and political events, or any other of the thousands of relevant factors that influence sales and profit change expectations in ways that cannot be quantified but that have large effects. To emphasize the volatility and diversity of sources of changes in expected sales and profits , Keynes described these expectations as animal spirits. In using this term, Keynes was not saying that expectations are irrational.
Rather he meant that because future sales and profits are impossible to forecast , it might be rational to take a view about them based on rumors, guesses, intuition, and instinct. The Multiplier effect is a basic economic concept, which refers to changes in the level of activity that brings further changes in the level of other activities throughout the economy. When an injection of expenditure into an economy leads to an increase in national income more than the original injection, this is the multiplier effect. In other words, the multiplier effect is the effect from continuous responding of incomes.
There are different types of multipliers, such as the sales or transaction multiplier, the output multiplier the employment multiplier, government revenue multiplier and the import multiplier. The multiplier indicates how many times that the injection of original spending circulates through a local economy. As a result of responding, it benefits the local people. According to “Tourism: Economic, Physical and Social Impacts”, “tourists expenditures in a destination creates new incomes and outputs in the region which, in turn, produce further expenditures and incomes (Mathieson, p.64). ”
How to calculate the multiplier and how does it work in tourism? Some examples will be given to illustrate the economic concept of multiplier effect. The income multiplier considers three levels of impact created by the change in tourist expenditure, which includes direct spending, indirect spending and induces spending. Let us look at the illustration in the following Example. The employees receive incomes and consume on goods and services. The supplier replenishes its stock makes payments of wages to their employees etc.
(This is induced effect of the tourist’s initial expenditure, which creates further economic activities. Most people living on Guam recognize that Guam is heavily dependent on the tourism income to create additional income and jobs for the economy. If tourist arrivals and their expenditures decrease, the island will experience an economic slump. The Asian financial crisis which occured since July 1997 is a good example. The decline in international arrivals has made many tourist destinations suffer. On Guam, many organizations have either closed down or reduced the number of working hours or number of employees.
When the recession begins, it is difficult to generate additional incomes throughout the economy for the limited spending in the economy. This is the multiplier effect. Guam needs tourist discretionary income to strengthen its economy. 3 Illustrate and explain how equilibrium in the money market is determined and its impact on interest rate real GDP, investment, aggregate expenditure and savings. Equilibrium in the money market occurs when the demand for money ( L) equal to the supply of money (M) . This equilibrium is achieved by changes in the rate of interest.
In appendix 1 equilibrium is achieved with a rate of interest re and a quantity of money Me. If the rate of interest exceeded re people would have money balances surplus to their needs. They would use these to buy securities and other assets. This would drive up the price of the securities and drive down the rate of interest. As the rate of the interest fell, there would be a contraction of the money supply (a movement down along the Ms Curve) and an increase in the demand for money balances. The interest rate would go on falling until it reached re.
A shift in either Ms or L will lead to a new equilibrium quantity of money and rate of interest at the new intersection of the curves. In practice there is no single rate of interest. Equilibrium in money markets, therefore, will be first where the total demands for and supply of money is equal. This is achieved by adjustments in the average rate of interest. Second, it will occur when demand and supply of each type financial asset separately excess supply of money to invest in long term assets ( like bonds), short term rates of interest would rise relative to long term rates. ( Sloman ; Norris, 1999)