The Fiscal Multiplier

G – T + B = Budget surplus OR deficit

Where

G = government spending

T = taxes

B = payment of transfer benefits

YD = Y – NT = (1 – t) Y

Where

NT = Net taxes (taxes less transfers)

YD = disposable income available to individuals

Y =  national income or output

t = net tax rate

The fiscal multiplier is the ratio of the change in equilibrium output to the change in autonomous spending that caused the change.

It measures how much output changes as exogenous changes occur in government spending or taxation.

Fiscal multiplier = 1/[1 – c(1 – t)]

Where

c = marginal propensity to consume

t = tax rate