Question

What is the “spending multiplier” and how does it inform the predictions that Keynesian economists assert for improvement in the economy as a result of fiscal policy?

Answer 1

How does it inform the predictions that Keynesian economists assert for improvement in the economy as a result of fiscal policy?

Ans: It shows how a given change in the government spending will have its multiplier impact on the output. The equation is written at the end of the image. If the value of multiplier is low, then a given change in the government expenditure will have less impact on the output. When the value of multiplier is more, a given change in the government expenditure will have more impact on the output. The value of multiplier shows a given change in spending would have multiple effects on income levels in the economy. In case of recession, the government can raise the government spending, so the economists can say that the income level will rise more than a change in government expenditure. So, the role of multiplier is very important in case of fiscal policy in the economy because it has the capacity to enlarge the effects of a fiscal policy on the economy. Knowing the magnitude or value of the multiplier, the economists can adjusts the government's fiscal policy accordingly.