Fiscal Multiplier
The ratio showing how much GDP changes for each dollar of government spending or tax change.
What is Fiscal Multiplier?
The fiscal multiplier measures how much total economic output (GDP) changes in response to a change in government fiscal policy. If a $1 increase in government spending ultimately raises GDP by $1.50, the multiplier is 1.5. The amplification occurs through cascading rounds of spending: government spending becomes someone's income, they spend a fraction (the marginal propensity to consume), that spending becomes someone else's income, and so on. Multipliers typically range from 0.5 to 2.0, depending on the type of spending, monetary policy environment, and the degree of economic slack. During recessions with idle resources, multipliers tend to be larger; in full-employment economies, government spending may crowd out private activity, reducing the multiplier.
Example
The government spends $100 billion on infrastructure. Workers and contractors receive income; assuming they spend 75 cents of each dollar earned, the first round generates $75 billion in additional spending. That generates $56 billion more, then $42 billion, and so on. The total GDP impact converges to $400 billion — a fiscal multiplier of 4. In practice, leakages (taxes, imports, savings) reduce the multiplier significantly below this theoretical maximum.
Source: IMF — Fiscal Monitor