Question

Two economists estimate the government expenditure multiplier and come up with different results. One estimates the multiplier at 0.8, while the other comes up with an estimate of 1.25. Explain why these estimates are different in terms of the assumptions that each economist is making.

Answer 1

Multiplier value depends upon the marginal propensity to consume. It may be possible that one of the economist has considered a lower value for the marginal propensity to consume and this has resulted a lower value of spending multiplier at 0.8. the other economist has considered a greater value of MPC which gives a greater value for spending multiplier

Government is increasing its spending by 800 billion dollar. This will increase the GDP value by 800*0.8 = 0.640 trillion. In terms of % this is equal to 0.64/13.28 = 4.82%.