Read Eye on the Multiplier on p. 792. Why do multiplier estimates differ? What conditions would be consistent with a large multiplier?

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EYE on the MULTIPLIER How Big Is the Government Expenditure Multiplier? Christina Romer, former Chair of the President's Council of Economic Advisers, has estimated the govern- ment expenditure multiplier to be 1.6. This number led administration econ- omists to predict that the stimulus plan that increased government expenditure would prevent the unem- ployment rate from rising much above 8 percent. This prediction turned out to be optimistic and one reason might be that the multiplier assumption is also too optimistic. Robert Barro, a leading macroecon- omist at Harvard University, has stud- ied the effects of very large increases in government expenditure during wars. He finds that the multiplier is only 0.8, which means that real GDP increases by less than the increase in government expenditure. The reason is that some private expenditure, mainly investment, gets "crowded out" and real GDP falls. John Taylor of Stanford University, another leading macroeconomist, agrees with Barro that the government expenditure multiplier is less than I. He says that crowding out gets more severe as time passes, so the multiplier CEA John Taylor year I Robert Barro John Taylor year 2 John Taylor year 3 0 0.5 gets smaller after two years and smaller still after three years. A big multiplier can occur only if there is substantial slack in the econ- omy when the recessionary gap is large. 1.0 1.5 2.0 Multiplier