What is the multiplier effect in fiscal policy?

What is the multiplier effect in fiscal policy?

The multiplier effect in fiscal policy refers to the phenomenon where an initial change in government spending or taxation leads to a larger overall impact on the economy. This occurs because the initial change in fiscal policy stimulates additional spending and economic activity, which in turn generates more income and further increases consumption and investment. The multiplier effect is based on the idea that when individuals or businesses receive additional income, they tend to spend a portion of it, creating a ripple effect throughout the economy. The size of the multiplier effect depends on various factors, such as the marginal propensity to consume and the extent to which the economy is operating below its potential output.