Fiscal Policy and Multipliers Effects - Section 4, Module 21

spending multiplier: 1/(1-MPC)

• negative if the govt purchases decrease instead of increase

real GDP/income change less because of changes in transfer payments/taxes

tax multiplier = -MPC/(1-MPC)

• transfer multiplier is same but positive

balanced budget multiplier - the factor by which a change in both spending and taxes changes real GDP: spending multiplier + tax multiplier = balanced budget multiplier

• always equal to 1

lump sum taxes - for which the amount owed is independent of the taxpayers income → rarely actually imposed

also, WHO gets tax cuts/transfer payments also impacts the multiplier/change

when real GDP rises, so does tax revenue

• income taxes bc of increased increase

  • reduces the size of multipliers bc any increase in real GDP leads to more taxes = smaller spending = smaller multipliers

• automatic stabilizers - govt spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts, and contractionary when the economy expands

  • ex: if GDP falls, so does tax revenue, which acts like automatic expansionary policy

• some types of govt transfers also act as automatic stabilizers

discretionary fiscal policy - fiscal policy that is not automatic, but rather deliberately done by govt