Evidence and data
Read disposable income, consumption, government spending, imports, and inventories. The diagram is a short-run goods-market accounting device.
Calibration or measurement
The marginal propensity to consume and leakages into taxes, imports, and saving set the multiplier.
Boundaries
- Interest rates, prices, and expectations are outside the simple cross.
- Capacity limits can make the multiplier smaller.
- Open-economy leakages matter.
Use guidance
- When sufficient
- Conveying the multiplier intuition when the interest rate is held fixed, prices are assumed rigid, and the question is purely about the round-by-round spending arithmetic. For a first-pass calculation of how a given increment of government spending propagates through household consumption when capacity is slack, the cross is the right starting point.
- When sketch only
- Do not use to predict the size of a real-world fiscal multiplier. The model fixes the interest rate by assumption, omits crowding-out, ignores price adjustment, and treats the marginal propensity to consume as stable. Each of those assumptions can fail in practice, and the direction of failure depends on the monetary regime and the liquidity position of households.
- When to switch
- Switch to IS-LM (theoretical:is-lm) when the interest-rate response to fiscal expansion matters. Switch to a New Keynesian model (dsge:nk) or HANK-lite (dsge:hank-lite) when expectations, price rigidity, or the distribution of liquidity among households determines the multiplier size.
- Falsification signal
- A fiscal expansion in a monetary-policy-passive environment that produces a multiplier far below one when households are not liquidity constrained would challenge the model. The post-2010 eurozone austerity episode produced multipliers that fiscal-austerity proponents expected to be small; IMF research found them to be larger than assumed, which is a different type of challenge to the cross's unconstrained baseline.