Almost every developed country experiencesserious
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.
Cite this paper
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