The Keynesian Fiscal Multiplier refers to the effect that an increase in government spending has on the overall economic output. According to Keynesian economics, when the government injects money into the economy, either through increased spending or tax cuts, it leads to a chain reaction of increased consumption and investment. This occurs because the initial spending creates income for businesses and individuals, who then spend a portion of that additional income, thereby generating further economic activity.
The multiplier effect can be mathematically represented as:
where is the marginal propensity to consume, indicating the fraction of additional income that households spend. For instance, if the government spends $100 million and the MPC is 0.8, the total economic impact could be significantly higher than the initial spending, illustrating the power of fiscal policy in stimulating economic growth.
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