Fiscal multiplier

The fiscal multiplier measures how much economic output changes in response to a change in government spending or taxation. Its size depends on economic conditions, policy design, and how households and firms respond.

Aggregate demand: Total planned spending on final goods and services in an economy at a given price level. Government purchases and tax changes alter components of demand that drive the multiplier.
Fiscal policy: Government decisions about spending, taxation, and borrowing used to influence the economy. The multiplier is a central estimate for predicting fiscal policy’s effect on output.
Ricardian equivalence: The proposition that households may offset government deficits by saving more in anticipation of future taxes. If households fully anticipate financing, deficit spending may produce little demand expansion.
American Recovery and Reinvestment Act of 2009: A United States law enacted in 2009 that combined spending, transfers, and tax reductions to counter the Great Recession. Its varied measures generated estimates of fiscal effects during a severe downturn.
Marginal propensity to consume: The share of an additional unit of disposable income that households spend on consumption. Repeated rounds of household spending depend on how much of each income gain is consumed.
Automatic stabilizer: A tax or spending feature that changes with economic activity and cushions fluctuations without new legislation. Its response to downturns affects both the size and timing of fiscal support.
Monetary offset: A central bank response that counteracts the effects of fiscal policy on aggregate demand. A policy-rate increase can reduce the output response predicted when monetary policy is held fixed.
Great Depression: A worldwide economic crisis that began in 1929 and brought prolonged declines in output and employment. Debates over fiscal expansion during the Depression helped shape modern multiplier analysis.
Keynesian cross: A model that determines equilibrium output where planned expenditure equals production. Its expenditure-line slope shows how induced spending magnifies an initial fiscal change.
Unemployment benefits: Government payments to eligible people who have lost work. Recipients often spend benefits quickly, making them a targeted source of demand support.

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