Analysis of balanced budget multiplier under monopolistic competition and proof of the existence of involuntary unemployment

Abstract

Using a model in which consumers’ utility is determined by consumption and savings, we show that the balanced budget multiplier is 1 even under monopolistic competition. In the second half, under the same model, we prove the existence of involuntary unemployment when government expenditure is insufficient and that involuntary unemployment is not eliminated and full employment is not automatically achieved even if the nominal wage rate and prices are flexible.