Answer to Question #142889 in Macroeconomics for John

Question

What is a multiplier? What purpose does it serve in policy making?

Answer 1

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A multiplier broadly refers to an economic factor that, when increased or changed, causes increases or changes in many other related economic variables. A multiplier affects the fiscal policy which engages policy making. A change in fiscal policy has a multiplier effect on the economy because fiscal policy affects spending, consumption, and investment levels in the economy. The multiplier effect is the amount that additional government spending affects income levels in the country.

Tax rates and government spending are the two main fiscal policy mechanisms. Normally, when the government tries to stimulate the economy, fiscal policy is used. Governments borrow money to spend on projects or return taxpayers money through lower tax rates or tax discounts. The overall economic impact is the same as when the government is aiming to target global demand and improve it.