Fiscal multiplier.
In plain English
The fiscal multiplier is a ratio: the change in gross domestic product divided by the change in government spending or taxes that caused it. A multiplier above 1 means each dollar generates more than a dollar of output, because the first recipient spends part of it, the next recipient spends part of that, and so on. Below 1 means some of the money is saved or leaks abroad through imports. Estimates vary widely by the type of spending, the state of the economy, and how the central bank responds. There is no single agreed value, and economists disagree about the range.
01Why it matters
The size of the multiplier decides whether a spending package actually lifts jobs and wages or mostly adds to debt, which is the real argument underneath most stimulus debates.
02The math, step by step
Say households spend 75 cents of every extra dollar. The simple multiplier is 1 divided by (1 minus 0.75), which is 1 divided by 0.25, or 4. A $50 billion spending increase would then raise output by $200 billion in that simplified model.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
The money multiplier describes how bank lending expands deposits from a base of reserves. The fiscal multiplier describes how government spending expands output through rounds of consumer spending. Different mechanism, different actors, similar arithmetic shape.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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