The fiscal multiplier measures the impact of government spending on the economy from "summary" of Public Finance by Harvey S. Rosen
The fiscal multiplier captures the idea that an initial change in government spending can lead to a larger change in aggregate output. In other words, when the government increases its spending, this injection of funds can set off a chain reaction of increased economic activity. This multiplier effect occurs because the recipients of government spending will in turn spend part of that money, leading to further rounds of spending in the economy.
The size of the fiscal multiplier depends on a variety of factors, including the marginal propensity to consume (MPC) of households. The MPC refers to the fraction of additional income that households spend on consumption. If households have a high MPC, then an increase in government spendin...
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