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Chapter 18: Problem 10

What do the values of the government spending and tax multipliers have to do with getting the biggest bang for the buck?

Short Answer

Expert verified
The government spending and tax multipliers show the effect of changes in government spending and taxes on the economy. A larger spending multiplier means that an increase in spending leads to a larger increase in output, while a larger (in magnitude) tax multiplier means a reduction in taxes results in a large increase in output. Therefore, these multipliers are a key to getting the 'biggest bang for the buck' in terms of economic stimulus.

Step by step solution

01

Understanding Financial Multipliers

The Government spending multiplier and Tax multiplier are key concepts in fiscal policy. The spending multiplier is calculated as 1/(1-MPC), where MPC stands for Marginal Propensity to Consume. It measures the impact of a change in government expenditure on the total income of a country. The tax multiplier is calculated as -MPC/(1-MPC) and it reveals the effect of a change in tax policies on the national income.
02

Relation to 'Bang for the Buck'

Getting the 'biggest bang for the buck' implies maximising the impact of spending or taxation changes on economic output. A larger multiplier means a larger change in output for a given change in spending or taxes. In other words, a high spending multiplier would mean that a dollar increase in government spending would lead to more than a dollar increase in total income or output of the economy. Similarly, a more negative tax multiplier means that a dollar decrease in taxes would result in more than a dollar increase in economic output.
03

Summary

Therefore, the values of the government spending and tax multipliers are directly tied to getting the 'biggest bang for the buck'. If these multipliers are large in absolute value, then changes in spending or taxes will have a greater impact on the economy

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Most popular questions from this chapter

Whether an economist argues in favor of a rise in government spending or a cut in taxes (as an expansionary fiscal policy measure) could have something to do with how he views the current size and scope of government in relationship to his optimal size and scope of government. Do you agree or disagree? Explain your answer.

Something is referred to as a "double-edged sword" if it can have both favorable and unfavorable consequences. In what way might government bailouts of failing companies or financial institutions be a double-edged sword? Explain your answer.

Whether an economist argues in favor of a rise in government spending or a cut in taxes (as an expansionary fiscal policy measure) could have something to do with whether she views the government spending multiplier as greater or less than the tax multiplier. Do you agree or disagree? Explain your answer.

Whether an economist argues in favor of a rise in government spending (as an expansionary fiscal policy measure) could have something to do with the degree of crowding out he expects as a result of the measure. Do you agree or disagree? Explain your answer.

Some economists argue that if the economy currently needs to be stimulated to remove it from a recessionary gap, how government spends more money (on X or Y) matters less than the fact that it does spend more money. Do all economists agree? If not, what do they say in response?
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