A reinterpretation of the Keynesian consumption function and multiplier effect

We propose a microeconomic foundation of the multiplier effect and that of the consumption function using a dynamic optimization model that explains a shortage of aggregate demand and unemployment. We show that government purchases boost aggregate demand through a multiplier-like process but that the implication is quite different. It works through not an increase in disposable income but moderation of deflation, which makes money holding costly and stimulates consumption. -- Keynesian consumption function ; multiplier effect ; Keynesian Cross ; persistent unemployment ; aggregate demand