Economic Stimulus Multiplier Effect
An Economic Stimulus Multiplier Effect is an economic phenomenon where a capital injection (typically government spending or investment) leads to a significant increase in economic output through subsequent cycles of spending that exceed the original stimulus.
- Context:
- It can also depend on Economic Multipliers.
- It can (often) be quantified using a multiplier, which is calculated as the change in income divided by the change in spending.
- It can influence various economic parameters such as income, employment and national GDP.
- It can have a reverse effect if government spending is decreased.
- It can be constrained by the economy's spare capacity and the crowding out effect.
- …
- Example(s):
- U.S. New Deal programs (1933-1943): estimated to have a multiplier effect of 1.5 to 2..
- U.S. G.I. Bill (1944-1956), estimated to have had a multiplier effect of 10 to 1.
- U.S. Marshall Plan (1948-1952): estimated to have a multiplier effect of 2.5 (includes German economic miracle (Wirtschaftswunder)).
- Japan's Post-War Economic Miracle (1952-1971), estimated to have had a multiplier effect of ____?
- U.S. Interstate Highway System (1956-1992), estimated to have had a multiplier effect of 2 to 1.
- U.S. Reagan Tax Cuts (1981-1988): estimated to have a multiplier effect of 0.6 to 2.9 (but also significantly increased government debt).
- Internet Development (Early 1990s-present), estimated to have had a multiplier effect of 3 to 1.
- …
- Counter-Example(s):
- a Direct Cash Injection into an economy.
- a Full Capacity Economy.
- See: Money Multiplier, Fiscal Multiplier, Economic Output Growth Value, Growth Rate, Economic Acceleration Principle.
References
2023
- Web Chatbot
- The economic multiplier effect is a concept that describes how an initial financial stimulus, particularly from government spending, can cause a more significant increase in national income. This is seen where, for example, a £1 billion boost results in a £1.7 billion increase in real GDP - signifying a multiplier value of 1.7. However, this can work inversely if government spending is reduced, potentially causing public sector job losses and a decrease in national income.
The overall value of the economic multiplier is dependent on the amount of the new funds disposed of within the domestic economy, and is also impacted by the economy's spare capacity. If at full capacity, further fiscal inputs may merely result in inflation rather than economic expansion. Government tax cuts can also affect the multiplier effect as it directly influences consumer spending and investments.
Additionally, the multiplier can be constrained by the crowding out effect - where increased government expenditure causes a reduction in private sector investments. However, from a Keynesian standpoint, during a recession this effect might be limited due to excessive unproductive savings in the private sector, which in turn could lead to a positive multiplier effect.
- The economic multiplier effect is a concept that describes how an initial financial stimulus, particularly from government spending, can cause a more significant increase in national income. This is seen where, for example, a £1 billion boost results in a £1.7 billion increase in real GDP - signifying a multiplier value of 1.7. However, this can work inversely if government spending is reduced, potentially causing public sector job losses and a decrease in national income.
2023
- (Investopedia, 2023) ⇒ http://www.investopedia.com/terms/m/multipliereffect.asp
- QUOTE: The multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital. In effect, Multipliers effects measure the impact that a change in economic activity—like investment or spending—will have on the total economic output of something. This amplified effect is known as the multiplier.
- Key Takeaways
- The multiplier effect is the proportional amount of increase or decrease in final income that results from an injection or withdrawal of spending.
- The most basic multiplier used in gauging the multiplier effect is calculated as the change in income divided by the change in spending and is used by companies to assess investment efficiency.
- The money supply multiplier, or just the money multiplier, looks at a multiplier effect from the perspective of banking and money supply.
- The money multiplier is a key concept in modern fractional reserve banking.
- Other multipliers include the deposit multiplier, fiscal multiplier, equity multiplier, and earnings multiplier.
2016
- (Investopedia, 2016) ⇒ http://www.investopedia.com/terms/m/multipliereffect.asp
- QUOTE: The multiplier effect is the expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. In other words, it is the money used to create more money and is calculated by dividing total bank deposits by the reserve requirement.