Fiscal Multiplier

CORE DEFINITION

The multiplier effect (English: Multiplier Effect), more fully known as the income/expenditure multiplier effect, is a concept in macroeconomics that refers to the phenomenon where a change in one variable in economic activity leads to a disproportionate change in aggregate demand. This concept is usually associated with Keynesian economics, while other schools of economics underestimate or deny its importance for the macroeconomy, especially in the long run. When an event occurs, and the cause that triggers it expands, the resulting income will also expand to a greater extent. For example, when the market is booming, government investment or public expenditure expands and taxes decrease, which has a multiplied effect on national income, thereby producing an expansionary effect on the macroeconomy. Principle: According to Keynes's absolute income theory, consumption expenditure is influenced by current income level, and there is a functional relationship between the two, namely: C = a + b(Y - t), where C is consumption expenditure, a is necessary consumption, Y is income, t is taxes, and b is the marginal propensity to consume, with 0 < b < 1. When disposable income (i.e., Y - t) increases by 1 unit, consumption expenditure will increase by b units.