3. Fiscal policy has a multiplier effect on the economy, the size of which depends upon the fiscal policy and the marginal propensity to consume. Except in the case of lump-sum taxes, taxes reduce the size of the multiplier.

Expansionary fiscal policy leads to an increase in real GDP, while contractionary fiscal policy leads to a reduction in real GDP. Because part of any change in taxes or transfers is absorbed by savings in the first round of spending, changes in government purchases of goods and services have a more powerful effect on the economy than equal-size changes in taxes or transfers.