Fiscal multiplier

Group activity:Fiscal Multiplier Worksheet“, March 2018

Instructor Resource: “Fiscal Multiplier Worksheet: Solution”, March 2018

According to Modern Monetary Theory (MMT), it’s fashionable to claim that a country that issues their own currency cannot default on its debt. But as Stephen Kirchner points out, they can and they have.

MMT is also invoked to claim that governments can make spending commitments (such as welfare spending) without having to raise taxes. Recollect the three main forms of government finance: (1) taxes; (2) borrowing; and (3) inflation. MMT essentially says that 1 & 2 are only necessary to prevent inflation, and therefore at full employment (i.e. with stable inflation) taxes or borrowing aren’t acting as a constraint on spending. Technically this is true, but I believe that it is an exercise in semantic word games to distinguish between their claim – that “taxes don’t fund the welfare state” – and the fact that taxes are required to offset the inflation that would otherwise be caused by the money printing used to fund the welfare state. (see here). Ultimately the achilles heel of MMT is real resource constraints. The problem with public finance has never been a shortage of cash, but the scarcity of the real factors of production. Printing money can bid those resources away from the private sector, but cannot create more of them.

This page ties into Chapter 9 of Economics: A Complete Guide for Business

Learning Objectives: Perform back of the envelope calculations to estimate the fiscal multiplier for a range of different countries.
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