CFA Level I · CFA Level I Exam · Fiscal Policy
Compared with an otherwise identical economy, the fiscal multiplier for a given increase in government spending is most likely smaller when the economy has:
The multiplier is most likely smaller with a high marginal propensity to import and a high income tax rate. Both are leakages that reduce the portion of extra income re-spent on domestic output, so each round of spending is weaker and the total effect is smaller.
- Aa high marginal propensity to consume and low tax rates.
- Bsubstantial unemployed resources and fixed interest rates.
- Ca high marginal propensity to import and a high income tax rate.Correct
Explanation
Leakages from taxes and imports reduce the share of each additional unit of income that is re-spent domestically, shrinking the multiplier. A high MPC with low taxes raises it, and idle resources with fixed rates avoid crowding out, also raising it.
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