A fiscal multiplier measures how much a country’s total economic output (GDP) changes in response to a change in government spending or taxation. It shows the ripple effect of fiscal policy on the broader economy. When a government increases spending or cuts taxes, households and businesses receive more income, which they then spend. That spending becomes income for others, creating multiple rounds of economic activity. The fiscal multiplier captures the total impact of this chain reaction.

For example, if the government spends $1 billion on infrastructure and GDP increases by $1.5 billion, the fiscal multiplier is 1.5. This means every dollar of public spending generated $1.50 in economic output. Multipliers tend to be larger during recessions, when unused resources and high unemployment allow additional demand to translate into higher production rather than inflation.

Institutions such as the International Monetary Fund and the World Bank frequently analyze fiscal multipliers to guide policy decisions, especially during economic downturns. However, the size of the multiplier depends on factors like consumer confidence, interest rates, openness to trade, and government debt levels. In open economies, part of the spending may leak into imports, reducing the multiplier effect.

Understanding the fiscal multiplier helps policymakers design effective stimulus programs and evaluate how fiscal actions influence growth, employment, and overall economic stability.