Fiscal Policy and the Multiplier

An expansionary fiscal policy, like the 2009 U.S. stimulus, pushes the aggregate demand curve to the right. A contractionary fiscal policy, like Lyndon Johnson’s tax surcharge, pushes the aggregate demand curve to the left. For policy makers, however, knowing the direction of the shift isn’t enough: they need estimates of how much a given policy will shift the aggregate demand curve. To get these estimates, they use the concept of the multiplier, which we learned about in Chapter 11.