Answer to Question #115673 in Macroeconomics for Mariense

Question

Why wealth inequalities can magnify the effect of fiscal multipliers effects?

Answer 1

Wealth inequalities can magnify the effect of fiscal multiplier because every society is not homogeneous in terms of its members' income. Therefore, the marginal propensity to spend and consume will differ for different groups of people. For example, if 80% of people get income equal to others' 20%, then MPS of this economy will be determined by 80% of people. At the same time, MPC for the poorest economy segment can be about 1, because of low income. All these factors will affect the fiscal multiplier.