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 are made either by regression analysis of past data or by fitting past data into an economic model. Since its value may be expected to vary due to variations in the factors that influence the accuracy of current estimates may be limited by the intrusion of unanticipated factors.