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. A limitation upon the usefulness of past evidence for that purpose arises from the possibility of a significant change in the factors that influence economic behaviour.