This crowding out can occur because the initial increase in spending may cause an increase in interest rates or in the price level. In certain cases multiplier values less than one have been empirically measured (an example is sports stadiums), suggesting that certain types of government spending crowd out private investment or consumer spending that would have otherwise taken place. The multiplier effect has been used as an argument for the efficacy of government spending or taxation relief to stimulate aggregate demand.

Some other schools of economic thought reject or downplay the importance of multiplier effects, particularly in terms of the long run. The existence of a multiplier effect was initially proposed by Keynes student Richard Kahn in 1930 and published in 1931. In other words, an initial change in aggregate demand may cause a change in aggregate output (and hence the aggregate income that it generates) that is a multiple of the initial change. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased income and hence 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. When this multiplier exceeds one, the enhanced effect on national income may be called the multiplier effect. More generally, the exogenous spending multiplier is the ratio of change in national income arising from any autonomous change in spending (including private investment spending, consumer spending, government spending, or spending by foreigners on the country's exports). In economics, the fiscal multiplier (not to be confused with the money multiplier) is the ratio of change in national income arising from a change in government spending. JSTOR ( March 2010) ( Learn how and when to remove this template message).Unsourced material may be challenged and removed.įind sources: 'Fiscal multiplier' – news Please help improve this article by adding citations to reliable sources. At the core of fiscal multiplier theory lies the idea of marginal propensity to consume (MPC), which quantifies the increase in consumer spending, as opposed to saving, due to an increase in the income of an individual, household, or society.This article needs additional citations for verification. The fiscal multiplier is a Keynesian idea first proposed by John Maynard Keynes's student Richard Kahn in a 1931 paper and is depicted as a ratio to show the causality between the controlled variable (changes in fiscal policy) and the outcome (GDP). Evidence suggests that lower-income households have a higher MPC than do higher-income households.

At the core of fiscal multiplier theory lies the idea of marginal propensity to consume (MPC), which quantifies the increase in consumer spending, as opposed to saving, due to an increase in the income of an individual, household, or society.The fiscal multiplier measures the effect that increases in fiscal spending will have on a nation's economic output or gross domestic product (GDP).

Spending multiplier macro definition