Multiplier effects of fiscal policy

Multiplier effects of fiscal policy means that an increase in government spending will lead to a higher increase in demand in the economy than just the spending growth.

A multiplier effect exists because a proportion of household income goes to consumption. It is important in fiscal policy that one takes the multiplier effect into account to not increase government spending too much.

Public expenditure is endogenous (not dependent on GDP) and generates a multiplier effect. Tax changes are exogenous (depends of GDP) and affects the multiplier. The tax rate is included in the multiplier. Tax cuts will make the multiplier larger.