Comment: To the OP

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To the OP

The best analogy is given by Peter Schiff in his 2006 mortgage bankers speech. He tells a story about fishermen on an island. It's a really easy way to grasp production and consumption. I forget how far into the video it is, I believe it's parts 1 or 2.

http://www.youtube.com/watch?v=6G3Qefbt0n4

The reason why your question is difficult to answer, and why so many people fall into the Keynesian trap, is because you ignore capital.

In the short term, #1 absolutely holds true. If you focus on consumption, it will in fact trigger additional production. However, it will happen at the expense of capital. Capital comes from savings, which comes from delaying consumption. If you increase consumption, you decrease savings, which decreases the future stock of capital. As a result, you won't be able to produce as much in the future. In other words, focusing on consumption in the future will be harder, as things will become more expensive, so every incremental dollar of "stimulus" won't create as much demand.

In the long term, focusing on production means you are putting off your consumption, investing instead in additional capital. As a result, you are able to produce more later, which makes it cheaper. As a result, you will be able to consume more later.

In the island fisherman analogy, the fishermen can either choose to spend their time manually catching and eating fish (consumption) or weaving fishing nets (savings). By putting off consumption and instead investing in nets, they are able to fish (produce) much more in the future due to the capital (the nets). As a result, they are able to consume more later. If you stimulated demand, people would simply manually catch more fish, but they wouldn't create more nets for the future, so in the long run you're hurting yourself. Hope that helps!