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The multipliers showed that any form of increased government spending would have more of a multiplier effect than any form of tax cuts. The most effective policy, a temporary increase in food stamps, had an estimated multiplier of 1.73. The lowest multiplier for a spending increase was general aid to state governments, 1.36.
Multipliers can be calculated to analyze the effects of fiscal policy, or other exogenous changes in spending, on aggregate output. For example, if an increase in German government spending by €100, with no change in tax rates, causes German GDP to increase by €150, then the spending multiplier is 1.5.
However, the size of this multiplier effect is likely to be diminished by two considerations: first, an upward push that the new spending gives to interest rates, which diminishes spending on goods such as physical capital and consumer durables; and second, an upward push that the spending gives to the general price level, which diminishes the ...
Chapter 10 introduces the famous 'multiplier' through an example: if the marginal propensity to consume is 90%, then 'the multiplier k is 10; and the total employment caused by (e.g.) increased public works will be ten times the employment caused by the public works themselves' (pp116f). Formally Keynes writes the multiplier as k=1/S'(Y).
Here we have an economy with zero marginal taxes and zero transfer payments. If these figures were substituted into the multiplier formula, the resulting figure would be 2.5. This figure would give us the instance where a (for instance) $1 billion change in expenditure would lead to a $2.5 billion change in equilibrium real GDP.
Where = is the Keynesian spending multiplier. For every A E 0 {\displaystyle AE_{0}} dollars injected into the economy, income increases by k > 1 {\displaystyle k>1} times that amount. If b = 1 {\displaystyle b=1} , the spending multiplier, and hence the equilibrium condition becomes undefined via division by zero.
An increase in government spending is one of the factors that economists say can drive inflation. Other factors include interest rates, monetary policy, supply chain disruptions and fluctuations ...
Therefore, the net change in spending (increased government spending and decreased consumption spending) at this point is positive, and the induced second and subsequent rounds of spending are also positive, giving a positive result for the balanced budget multiplier.