Fiscal Policy – the Government Spending Multiplier

This video will introduce and explain the effect of an expansionary fiscal policy on aggregate demand, specifically an increase in government spending. When government spending increases, household incomes rise and therefore consumption increases, further adding to the expansionary effect on Aggregate Demand. If we know the marginal propensity to consume among a nation’s households, we can calculate the size of the spending multiplier, and thereby determine how much of a stimulus would be needed to increase AD by a particular desired amount.

Once you’ve watched the video, read and respond to the discussion questions for one of the following blog posts:

• How big is the government spending multiplier in America? Well, it depends on which economist you ask…
• The Multiplier Effect as it applies to the Obama camp’s fiscal stimulus proposal
• An Asian Exodus?
• The potency of government spending and taxation