WEEK 3 DISCUSSION

Fiscal Multipliers
Refer to the discussion of fiscal multipliers as developed in Chapter 3 to answer the following
questions:

(a) Explain why an increase in government purchases of goods and services of increases GDP
dollar for dollar whereas a decrease in taxes (and increases in transfer payments) of equal
magnitude increases GDP by less. That is, the immediate impact- the impact effect- of a change
in G by $100 on (Y) is also $100, whereas the effect of a decrease in T by $100 increases Y by
less than $100 and depends on the behavior (reaction) of recipients. Limit your answer to 75
words.

(b) There are several determinants of fiscal multipliers other than the basic ones discussed in
chapter 3. Your task is to research beyond this chapter to identify (NOT GUESS) and discuss
ONE additional determinant of fiscal multipliers not discussed there. Limit your answer to 50
words.

Answer:

(a) Increase in government spending, leads to a magnified effect in aggregate demand. That
means a decrease in unemployment, which in turn increases the income and taxes,
sparking an increase in consumer spending leading to a dollar by dollar increase of GDP.
Whereas when a decrease in tax and increase in transfer payments occurs, the marginal
propensity to save of those receiving these payments not being zero leads to the less than
equal growth of GDP.

(b) I would like to shed light on the ‘Debt level’ determinant of fiscal multiplier which falls
under structural characteristic. In high-level debt countries, the multipliers are lower. This
is due to the fact that fiscal consolidation will likely have a positive credibility effect on
private demand and interest rate. (Batini, N., Eyraud, L., Forni, L., & Weber, A. (n.d.).
9)

References

Batini, N., Eyraud, L., Forni, L., & Weber, A. (n.d.). ©International Monetary Fund. not for
redistribution. Retrieved September 27, 2022, from
https://www.imf.org/external/pubs/ft/tnm/2014/tnm1404.pdf