Question

What do the values of the government spending and tax multipliers have to do with getting the biggest bang for the buck?

Short answer

The government spending and tax multipliers show the effect of changes in government spending and taxes on the economy. A larger spending multiplier means that an increase in spending leads to a larger increase in output, while a larger (in magnitude) tax multiplier means a reduction in taxes results in a large increase in output. Therefore, these multipliers are a key to getting the 'biggest bang for the buck' in terms of economic stimulus.

Step-by-step solution

Understanding Financial Multipliers

The Government spending multiplier and Tax multiplier are key concepts in fiscal policy. The spending multiplier is calculated as 1/(1-MPC), where MPC stands for Marginal Propensity to Consume. It measures the impact of a change in government expenditure on the total income of a country. The tax multiplier is calculated as -MPC/(1-MPC) and it reveals the effect of a change in tax policies on the national income.

Relation to 'Bang for the Buck'

Getting the 'biggest bang for the buck' implies maximising the impact of spending or taxation changes on economic output. A larger multiplier means a larger change in output for a given change in spending or taxes. In other words, a high spending multiplier would mean that a dollar increase in government spending would lead to more than a dollar increase in total income or output of the economy. Similarly, a more negative tax multiplier means that a dollar decrease in taxes would result in more than a dollar increase in economic output.

Summary

Therefore, the values of the government spending and tax multipliers are directly tied to getting the 'biggest bang for the buck'. If these multipliers are large in absolute value, then changes in spending or taxes will have a greater impact on the economy