Question

1. Government economists calculate the effects of an economic stimulus package using estimates of the government spending multiplier. Some economists, though, argue that these economists have overestimated the sizes of the government purchases and tax multipliers. Other economists have argued that the sizes of these multipliers were underestimated. Why do economists have difficulty in reaching agreement on the sizes of these multipliers? nted the sizes of the government

Answer 1

ANSWER:

The principle of multiplier does not work vigorously in an underdeveloped country such as India due to the inelastic nature of the consumption output curve. Also the value of the multiplier is limited by the consumption goods availability. Also the marginal propensity to consume is assumed to remain constant failing which the multiplier's value would be highly unstable. Moreover, to realize the full impact of the multiplier process, it is assumed that the nation should not have any trade relations with the outside world. When the economy is open to the rest of the world, export deficits and surpluses would make the value of the multiplier either smaller or greater than its true value respectively. Due to the above mentioned reasons economists argue on under-estimation and over-estimation of multiplier.