- Fiscal multipliers refer to the effect of government expenditure on GDP growth.
- It is the ratio of GDP increase to government spending amount.
- Example: Rs. 1 increase in railway investment increases GDP by Rs. 5.
- Impact on Economic Growth:
- A large multiplier means government spending can significantly boost output.
- Fiscal policies are more effective in recessions (multipliers are greater).
- Spending in areas with large multipliers (like infrastructure) can significantly crowd in private investment.
- This leads to higher economic growth rates.
| Business Cycle Fiscal Policy | Boom | Recession | Outcome |
|---|---|---|---|
| Pro-Cyclical | Expenditure increases Tax decreases | Expenditure decreases Tax increases | Deepens recessions and amplifies expansions, thereby increasing fluctuations in the business cycles |
| Counter Cyclical | Expenditure decreases Tax increases | Expenditure increases Tax decreases | Softens the recession and moderates the expansions, thereby decreasing fluctuations in the business cycle |