How is the fiscal multiplier effect defined?

The fiscal multiplier effect is fundamentally defined as the change in output in response to fiscal policy changes. This concept illustrates how an initial change in government spending or taxation can lead to a greater overall impact on economic output.

When the government increases spending, for instance, it directly raises demand within the economy. This initial increase in spending leads to higher income for those employed in the projects funded by this spending. These individuals are likely to spend a portion of their increased income, thereby generating further demand and income for others. The cycle continues, resulting in a multiplied effect on the economy's total output beyond the original spending.

In contrast, the other definitions do not capture this broad impact on the overall output of the economy. The measure of interest rate changes on spending focuses more on monetary policy rather than fiscal policy. The impact of taxes on consumer behavior examines how tax changes influence individual spending, but it does not inherently address the multiplier concept. Lastly, the proportion of debt paid off through government revenue does not relate to the idea of the fiscal multiplier, which is more about the responsiveness of output to changes in fiscal policy rather than debt management. Thus, understanding the fiscal multiplier is crucial for analyzing how fiscal policies can stimulate or contract economic activity.