FISCAL-POLICY MULTIPLIERS

The multiplier analysis shows that government fiscal policy is high-powered spending much like enlistment The parallel suggests that fiscal policy should also have multiplier effects upon output, And this is exactly right.

The spell Surreptitiousness multiplier is the increase in GDP resulting from an increase of $1 in government purchases of goods and services. An initial government purchase of a good or service will set in motion a chain of spending: if the government builds a road, the road-builders will spend some of their incomes on consumption goods, which in turn will generate additional incomes, some of which will be spent, hi the simple model examined here, the Ultimate effect on GDP of an extra doll~ of c will be the same as the effect of an extra dollar of I: the multipliers are equal to 1/(1 – MPC). Figure 24-8 shows how a change in G will result in a higher level of GDP, with the increase being a multiple of the increase in government purchases,

Government purchases of goods and services (G) are an important force in determining output and employment. In the multiplier model, if G increases. output will rise by the increase in G times the expenditure multiplier. Government purchases therefore have the potential to stabilize or destabilize output over the business cycle.

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