Economists in the Obama administration estimated that the government stimulus pa

Question

Economists in the Obama administration estimated that the government stimulus package in 2011 has a multiplier value of 1.57, while other economists have estimated the multiplier to be only 0.61. a. Briefly explain how the government spending multiplier can have a value less than 1. b. Why does an estimate of the size of the multiplier matter in evaluating the effects of an expansionary fiscal policy? c. Which types of government spending have high multiplier effects and which types have low multiplier effects?

Explanation / Answer

Govt. Spending multiplier can be less than one in case of crowding out. An increase in G may cause a decrease in pvt. Investment which might decrease the equilibrium level of output and thus net effect of govt expenditure decreases or simutaneously govt increases tax to finance G but this is known as balanced budget multiplier.

B) because change in real GDp=multiplier*change in G

Higher the multiplier, higher the effect of fiscal policy on output or real GDP

C) expansionary fiscal policy have higher multiplier effect as compared to monetary policy effect but it depends on other economic paraneters

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