Why fiscal policy has a multiplied effect on natural incme?

Answer 1

Fiscal policy can have a multiplied effect on national income due to the concept of the fiscal multiplier, which arises when government spending or tax changes influence overall economic activity. When the government increases spending, it directly raises demand for goods and services, leading to higher production and income for businesses and employees. This initial spending creates a ripple effect, as recipients of this income tend to spend a portion of it, further stimulating demand and income in the economy. Consequently, the initial fiscal action generates a larger overall impact on national income than the amount initially spent or taxed.