Fiscal Multiplier

The fiscal multiplier measures how much a change in government spending or taxation moves total national income, because an initial round of spending becomes someone else's income, part of which is spent again, and so on. The existence of a multiplier effect was first proposed by Keynes's student Richard Kahn in 1930 and published in 1931, and it became a foundation of Keynesian arguments for using public works and other spending programs to stimulate a depressed economy. Economists continue to debate the size of the multiplier in practice, since it depends on how much of new income is spent rather than saved, how open the economy is to imports, and whether the central bank offsets the spending with tighter monetary policy.