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Fiscal Multipliers July 6, 2009

Posted by petrarcanomics in Role of Government.
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The spending multiplier formula is the one divided by the marginal propensity to save (MPS).

The tax multiplier formula is the marginal propensity to consume (MPC) over the marginal propensity to save (MPS). MPC + MPS must equal one.

Multipliers work by multiplying their value times the change in government spending or the change in taxes to calculate the overall effect of a  fiscal policy. The multiplier effect for taxes is smaller than the multiplier effect for government spending changes because of the leakage of savings involved with a change in tax policy.

For example, a government spending increase of four hundred billion dollars with a multiplier of 1/.25 would result in an increase in real national income or output of 1.6 trillion dollars.

For example, an expansionary tax cut of four hundred billion dollars times a multiplier of .75/.25 would result in an increase in real national income or output of 1.2 trillion dollars.

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