multiplier effect

Examples of multiplier effect in the following topics:

• The Multiplier Effect

  • When the fiscal multiplier exceeds one, the resulting impact on the national income is called the multiplier effect.
  • When the fiscal multiplier exceeds one, the resulting impact on the national income is called the multiplier effect.
  • The multiplier effect is a tool that is used by governments to attempt to stimulate aggregate demand in times of recession or economic uncertainty .
  • Although the multiplier effect usually measures values of one, there have been cases where multipliers of less than one are measured.
  • During recessions, the government can use the multiplier effect in order to stimulate the economy.

• Fiscal Policy and the Multiplier

  • Fiscal policy can have a multiplier effect on the economy.
  • In addition to the spending multiplier, other types of fiscal multipliers can also be calculated, like multipliers that describe the effects of changing taxes.
  • The size of the multiplier effect depends upon the fiscal policy.
  • The multiplier effect determines the extent to which fiscal policy shifts the aggregate demand curve and impacts output.
  • Describe the effects of the multiplier beyond its relevance to fiscal policy

• Automatic Stabilizers

  • What makes automatic stabilizers so effective in dampening economic fluctuations is the fiscal multiplier effect.
  • The fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it.
  • When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect.
  • The multiplier effect occurs as a chain reaction.
  • This consumption-production-consumption cycle leads to the multiplier effect, resulting in an overall increase in national income greater than the initial incremental amount of spending.

• Fiscal Levers: Spending and Taxation

  • The government spending multiplier effect is evident when an incremental increase in spending leads to an rise in income and consumption.
  • The tax multiplier is the magnification effect of a change in taxes on aggregate demand.
  • However, the tax multiplier is smaller than the spending multiplier.
  • The money that is saved does not contribute to the multiplier effect .
  • The multiplier effect of a tax cut can be affected by the size of the tax cut, the marginal propensity to consume, as well as the crowding out effect.

• How Fiscal Policy Can Impact GDP

  • Expansionary fiscal policy can impact the gross domestic product (GDP) through the fiscal multiplier.
  • The fiscal multiplier (which is not to be confused with the monetary multiplier) is the ratio of a change in national income to the change in government spending that causes it.
  • When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect.
  • The multiplier effect arises when an initial incremental amount of government spending leads to increased income and consumption, increasing income further, and hence further increasing consumption, and so on, resulting in an overall increase in national income that is greater than the initial incremental amount of spending.
  • The multiplier effect has been used as an argument for the efficacy of government spending or taxation relief to stimulate aggregate demand.

• Limits of Fiscal Policy

  • When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect.
  • The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending.
  • How effective fiscal policy is depends on the multiplier.
  • The greater the multiplier, the more effective the policy.
  • If for some reason outside of the control of the government the multiplier remains low, the effectiveness of fiscal policy will remain limited at best.

• The Money Multiplier in Reality

  • In reality, it is very unlikely that the money supply will be exactly equal to reserves times the money multiplier.
  • The money multiplier in theory makes a number of assumptions that do not always necessarily hold in the real world.
  • In reality, not all of these are true, meaning that the observed money multiplier rarely conforms to the theoretical money multiplier.
  • If the customer fails to spend this money, it will simply sit in the bank account and the full multiplier effect will not apply.
  • Explain factors that prevent the money multiplier from working empirically as it does theoretically

• The Reserve Ratio

  • Money growth in the economy can occur through the multiplier effect resulting from the reserve ratio.
  • For example, a reserve ratio of 20% will result in 80% of any given initial deposit being loaned out and if the process of loaning is assumed to continue, the maximum increase in money expansion specific to an initial deposit at a 20% reserve ratio will be equal to the reserve multiplier 1/(reserve ratio) x the initial deposit.
  • For example, with the reserve ratio (RR) of 20 percent, the money multiplier, m, will be calculated as:

• How Fiscal Policy Relates to the AD-AS Model

  • The extent of the shift in the AD curve due to government spending depends on the size of the spending multiplier, while the shift in the AD curve in response to tax cuts depends on the size of the tax multiplier.

• The Money Multiplier in Theory

  • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
  • In order to understand the money multiplier, it's important to understand the difference between commercial bank money and central bank money.
  • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
  • We can derive the money multiplier mathematically, writing M for commercial bank money (loans), R for reserves (central bank money), and RR for the reserve ratio.
  • If banks instead lend less than the maximum, accumulating excess reserves, then commercial bank money will be less than central bank money times the theoretical multiplier.