In our simple models, the multipliers are the same for all spending and all taxes. How do real world multipliers differ? How do they impact fiscal policy?

Expert Solution

In the real world

Spending multiplier = 1/(1-MPC)

Taxation multiplier = MPC /(1-MPC)

In the real world , a person does not consume all of his income , he saves some. Hence , value of MPC can never be 1. This brings us to the conclusion that in real world , the value of spending multiplier will be greater than the value of tax multiplier. Hence if the fiscal policy of greater spending is opted , it would have a larget impact on the rise in GDP for the economy as compared to the tax decrease which is likely to have a lesser impact because some part of that decreased portion of tax will be saved leading to decreased value of multiplier.

Rahul Sunny answered 2 years ago

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In our simple models, the multipliers are the same for all spending and all taxes. How do real world multipliers differ? How do they impact fiscal policy?

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