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HomeHomework HelpeconomicsSpending and Tax Multipliers

Spending and Tax Multipliers

Spending and tax multipliers are essential concepts in Keynesian economics that measure the impact of fiscal policy changes on aggregate demand (AD). The spending multiplier is calculated as 1 divided by the marginal propensity to save (MPS), while the tax multiplier uses the formula of negative marginal propensity to consume (MPC) over MPS. Understanding these multipliers helps students analyze how changes in government spending or taxation can effectively close output gaps and stimulate economic activity.

intermediate
2 hours
Economics
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Spending and tax multipliers are essential concepts in economics that help us understand how fiscal policy impacts the economy. When the government increases spending or cuts taxes, it can lead to a ripple effect, boosting overall economic output. The size of this effect depends on factors like the ...

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Key Terms

Multiplier Effect
The proportional increase in final income that results from an injection of spending.

Example: If the government spends $1 million, and the multiplier is 2, the total economic output increases by $2 million.

Fiscal Policy
Government policy regarding taxation and spending to influence the economy.

Example: Increasing government spending during a recession is an example of expansionary fiscal policy.

Aggregate Demand
The total demand for goods and services within an economy at a given overall price level.

Example: An increase in consumer spending raises aggregate demand.

GDP (Gross Domestic Product)
The total value of all goods and services produced in a country in a specific time period.

Example: A growing GDP indicates a healthy economy.

Disposable Income
The amount of money that households have available for spending and saving after income taxes have been deducted.

Example: A tax cut increases disposable income, allowing consumers to spend more.

Economic Output
The total value of all goods and services produced in an economy.

Example: Economic output can be measured by GDP.

Related Topics

Fiscal Policy
The use of government spending and taxation to influence the economy.
intermediate
Economic Growth
The increase in the production of goods and services in an economy over time.
intermediate
Consumer Behavior
The study of how individuals make decisions to spend their available resources.
intermediate

Key Concepts

Multiplier EffectFiscal PolicyAggregate DemandEconomic Output