Multipliers, such as fiscal policy decisions and bank lending, affect a system by causing interconnected elements to move in response. Economists use multipliers to measure proportional changes in a system and predict the impact of decisions. The interconnected nature of systems must be considered when thinking about the impact of a change on the system. Governments aim to promote stable economic growth, and the multiplier is an important concept in economic policy-making. However, policy changes can backfire if they do not have the desired effect.
A multiplier is something that affects a system by making a change from the outside, causing interconnected elements of the system to move in response. Some examples of multipliers include fiscal policy decisions made by governments and the ability of banks to lend. In both cases, as well as having immediate effects such as raising taxes or making more credit available, the multiplier is associated with a chain reaction and a series of changes throughout the system. These changes can be predicted by economists to assess the impact before the decision is made.
Multipliers are used to measure proportional changes in a system. Economists observe both the positive changes that can be made with a single multiplier, such as a reduction in the unemployment rate caused by increased availability of credit and subsequent job opportunities, and negative changes, such as a decrease in consumer spending caused by increases of taxes. When developing economic and fiscal policy, the multiplier effect must be considered.
The interconnected nature of systems economists is an important thing to consider when thinking about the impact of a change on the system. In the taxation example, lowering taxes does more than increase personal spending because people keep more than their wages. It also reduces government revenues, but it can also stimulate economic growth as consumers demand more products and companies ramp up production and expand to meet demand. Decision-making economists think about how the multiplier will play out across the system to decide whether a change will have positive or negative effects.
Governments generally want to promote stable and regular economic growth with the aim of remaining fiscally stable and keeping the population satisfied with economic conditions. Economic decline may be a cause for concern, as is rapid acceleration indicative of a bubble phenomenon. A number of tools have been developed to quantify and explore the behaviors of national economies, as well as those on a smaller scale, and the multiplier – an external factor with a proportional impact on the economy – is an important concept.
People can see examples of the multiplier at work in a wide variety of contexts, as both businesses and governments make policy changes designed to develop economies, as well as expand businesses. Sometimes, economic forecasts backfire and a policy change may not have the desired effect; for example, instead of spending money when taxes are cut, taxpayers could set aside their increased income in savings to address concerns about future cash flow problems and other issues.
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