When we estimate the multiplier[1]empirically, we find that the size of the multiplier can vary depending on what type of fiscal stimulus is used. In class, we saw that when the federal government directly purchases goods and services, the multiplier is estimated to be 2.5. However, tax cuts for higher income people and corporate tax cuts are associated with multiplier estimates of only 0.6 and 0.4. [15]

a. Is a multiplier of 2.5 or 0.4 more desirable when the economy is in a recession?

b. What are some reasons why tax cuts to corporations and tax cuts to high income individuals might lead to a smaller multiplier? Please explain your answer.

[1]Change in Y due to a change in autonomous spending (i.e. G, government spending)