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Eco economics

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7 Why are the concepts of the multiplier and the marginal propensity to consume important to understand in the context of fiscal policy? In your response, define each of these terms. (250 words)

The goal of fiscal policy is to stimulate the economy and increase general economic welfare by using the minimum of resources, thus the multiplier affect is a very important concept within the use of fiscal policy. The multiplier effect can be understood as when a change in aggregate demand causes a further change in aggregate output for the economy. When the government for instance increases its spending it will be putting more money into the individuals who receive that money. These individuals will then consume more because they have more recreational money, this further stimulates the economy to hire more people and build more products which further stimulates growth within the economy. At each stage of this process, there is a multiplier effect where the results of the initial spending of the government is multiplied many different times during different stages of the actual process. Thus the net impact of their initial investment is much larger than the actual investment itself. The concept of the multiplier