Multiplier effect

The multiplier effect is the effect of an injection or withdrawal of income upon the level of activity in an economy. Estimates of its magnitude are consequently a major factor in the formulation of fiscal policy. Its existence, and the factors that determine it, can be established by logical deduction, but estimates of its magnitude depend upon induction from the evidence of past experience. Its deductive basis is examined in the article on the spending multiplier, and empirical estimates of its magnitude are surveyed in the article on the fiscal multiplier.