ECO 1102 Lecture Notes - Lecture 19: Fiscal Multiplier, Aggregate Demand, Potential Output
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Document Summary
The initial impetus of g triggers a ripple effect of consecutive rounds of changes in induced spending. Each induced increase to spending gets smaller and smaller in magnitude. The cumulative sum of the changes in spending approach a limit, then aggregate. The higher the marginal propensity to consume, the higher the volume of the multiplier. The higher the value of the multiplier, as less income leaks out of the circular flow in the form of savings. The higher the impact of a change in growth on aggregate expenditure. A multiplier process is triggered by a change in taxes instead of a change in government expenditure. Fiscal policy is an effective means to remedy the negative shocks that constantly occur. Increased spending and/or decreased taxes expands the aggregate demand to counteract that immediate supply/demand shock. Based on the theory of keynes, it had faith in the government to execute an effective fiscal policy.
