To what extent would a change in fiscal policy increase real GDP for an economy?

Keynesian economists would argue if an economy incorporates an expansionary fiscal stance (where by an increase in government spending or a reduction in income tax occurs) will help elevate real GDP. Real GDP can be defined as the total value of all goods and service produced in an economy over a specific period of time adjusted for inflation. An expansionary fiscal policy stance will lead to an increase in real GDP through the multiplier effect. An initial reduction in income tax (an expansionary fiscal measure), e.g. reducing the bottom marginal rate of tax from 20% to 15%. Resulting in an increase in disposable income for consumers, hence an increase in disposable income from consumers would trigger an increase in spending leading to more goods and services being sold. Also more goods and services would be produced as demand has increased. Hence resulting in an increase in real GDP. This process can be illustrated as the multiplier effect, as one component of aggregate demand (aggregate demand is composed of consumption, government spending, investment and net exports) increases this leads to an equal or more than disproportional increase in real GDP. Furthermore, an increase in real GDP could also result in the accelerator effect. Whereby an increase in real GDP may lead to an increase in investment as investors may have greater confidence in the economy due real GDP increasing, therefore real GDP maybe stimulated to an even greater degree. Additionally, a reduction in the bottom marginal rate of income tax maybe very effective as those on lower incomes have a greater marginal propensity to consume , hence less income will be saved and result in fewer leakages in the economy which may not reduce the impact the multiplier effect hence real GDP may not grow as fast as it could.

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