the Multiplier
In economics, a multiplier broadly refers to an economic factor that, when increased or changed, causes increases or changes in many other related economic variables. In terms of gross domestic product, the multiplier effect causes gains in total output to be greater than the change in spending that caused it.
The term multiplier is usually used in reference to the relationship between government spending and total national income. Multipliers are also used in explaining fractional reserve banking, known as the deposit multiplier.
KEY TAKEAWAYS
https://www.investopedia.com/terms/m/multiplier.asp
By ADAM HAYES
The term multiplier is usually used in reference to the relationship between government spending and total national income. Multipliers are also used in explaining fractional reserve banking, known as the deposit multiplier.
KEY TAKEAWAYS
- A multiplier refers to an economic factor that, when applied, amplifies the effect of some other outcome.
- A multiplier value of 2x would therefore have the result of doubling some effect; 3x would triple it.
- Many examples of multipliers exist, such as the use of margin in trading or the money multiplier in fractional reserve banking
https://www.investopedia.com/terms/m/multiplier.asp
By ADAM HAYES
The tax multiplier is the ratio of the total change in real GDP caused by a change in taxes; for example, if the tax multiplier is -4, then a $100 tax increase will decrease real GDP by $400. For example, if the government has an output gap of $400 million and the tax multiplier is -4, then the government can close that gap by decreasing taxes by only $100 million.
A change in taxes also results in a multiplier effect. The tax multiplier tells you just how big of a change you will see in real GDP as a result of a change in taxes. For example, imagine the government gives out a total of $1 million dollar in tax refunds. As a result, there is a $3 million dollar increase in real GDP. Therefore, the tax multiplier is -3. The tax multiplier is always one less in magnitude than the expenditure multiplier, and it is always a negative number.
We can see how this plays out in the table shown below. Suppose of spending $1 million dollars on gerbil rockets, the government gave out $1 million dollars in tax rebates to the employees at Rockets R Us
A change in taxes also results in a multiplier effect. The tax multiplier tells you just how big of a change you will see in real GDP as a result of a change in taxes. For example, imagine the government gives out a total of $1 million dollar in tax refunds. As a result, there is a $3 million dollar increase in real GDP. Therefore, the tax multiplier is -3. The tax multiplier is always one less in magnitude than the expenditure multiplier, and it is always a negative number.
We can see how this plays out in the table shown below. Suppose of spending $1 million dollars on gerbil rockets, the government gave out $1 million dollars in tax rebates to the employees at Rockets R Us
Why is it less? Notice that there is a round missing here: the initial $1 million dollars in tax rebates themselves are not counted. The impact of the tax is indirect, not direct. That missing initial amount is why the tax multiplier is always 1 less than the expenditure multiplier.
https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/national-income-and-price-determinations/multipliers-ap/a/lesson-summary-the-expenditure-and-tax-multipliers
https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/national-income-and-price-determinations/multipliers-ap/a/lesson-summary-the-expenditure-and-tax-multipliers
The fiscal/spending multiplier measures the effect that increases in fiscal spending will have on a nation's economic output, or gross domestic product (GDP).
Understanding the Fiscal MultiplierThe fiscal multiplier is a Keynesian idea first proposed by John Maynard Keynes's student Richard Kahn in a 1931 paper and is depicted as a ratio to show the causality between the controlled variable (changes in fiscal policy) and the outcome (GDP). At the core of fiscal multiplier theory lies the idea of marginal propensity to consume (MPC), which quantifies the increase in consumer spending, as opposed to saving, due to an increase in the income of an individual, household, or society.
Fiscal multiplier theory posits that as long as a country's overall MPC is greater than zero, then an initial infusion of government spending should lead to a disproportionately larger increase in national income. The fiscal multiplier expresses how much greater or, if stimulus turns out to be counterproductive, smaller the overall gain in national income is than the amount of extra spending. The formula for the fiscal multiplier is 1/1-MPC
For example, say that a national government enacts a $1 billion fiscal stimulus and that its consumers' MPC is 0.75. Consumers who receive the initial $1 billion will save $250 million and spend $750 million, effectively initiating another, smaller round of stimulus. The recipients of that $750 million will spend $562.5 million, and so on.
The total change in national income is the initial increase in government, or "autonomous," spending times the fiscal multiplier. Since the marginal propensity to consume is 0.75, the fiscal multiplier would be four. Keynesian theory would, therefore, predict an overall boost to national income of $4 billion as a result of the initial $1 billion fiscal stimulus.
KEY TAKEAWAYS
Empirical evidence suggests that the actual relationship between spending and growth is messier than theory would suggest. Not all members of society have the same MPC. For instance, lower-income households tend to spend a much greater share of a windfall than higher-income ones. MPC also depends on the form in which fiscal stimulus is received. Different policies can, therefore, have drastically different fiscal multipliers.
https://www.investopedia.com/terms/f/fiscal-multiplier.asp
By AKHILESH GANTI
Understanding the Fiscal MultiplierThe fiscal multiplier is a Keynesian idea first proposed by John Maynard Keynes's student Richard Kahn in a 1931 paper and is depicted as a ratio to show the causality between the controlled variable (changes in fiscal policy) and the outcome (GDP). At the core of fiscal multiplier theory lies the idea of marginal propensity to consume (MPC), which quantifies the increase in consumer spending, as opposed to saving, due to an increase in the income of an individual, household, or society.
Fiscal multiplier theory posits that as long as a country's overall MPC is greater than zero, then an initial infusion of government spending should lead to a disproportionately larger increase in national income. The fiscal multiplier expresses how much greater or, if stimulus turns out to be counterproductive, smaller the overall gain in national income is than the amount of extra spending. The formula for the fiscal multiplier is 1/1-MPC
For example, say that a national government enacts a $1 billion fiscal stimulus and that its consumers' MPC is 0.75. Consumers who receive the initial $1 billion will save $250 million and spend $750 million, effectively initiating another, smaller round of stimulus. The recipients of that $750 million will spend $562.5 million, and so on.
The total change in national income is the initial increase in government, or "autonomous," spending times the fiscal multiplier. Since the marginal propensity to consume is 0.75, the fiscal multiplier would be four. Keynesian theory would, therefore, predict an overall boost to national income of $4 billion as a result of the initial $1 billion fiscal stimulus.
KEY TAKEAWAYS
- The fiscal multiplier measures the effect that increases in fiscal spending will have on a nation's economic output, or gross domestic product (GDP).
- At the core of fiscal multiplier theory lies the idea of marginal propensity to consume (MPC), which quantifies the increase in consumer spending, as opposed to saving, due to an increase in the income of an individual, household or society.
- Empirical evidence suggests that lower-income households have a higher MPC than do higher-income households.
Empirical evidence suggests that the actual relationship between spending and growth is messier than theory would suggest. Not all members of society have the same MPC. For instance, lower-income households tend to spend a much greater share of a windfall than higher-income ones. MPC also depends on the form in which fiscal stimulus is received. Different policies can, therefore, have drastically different fiscal multipliers.
https://www.investopedia.com/terms/f/fiscal-multiplier.asp
By AKHILESH GANTI
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