← Macro-economic influences on the New Zealand economy
The multiplier and fiscal policy
Almost every recent paper puts a real number through the multiplier formula — Q2 in both 2024 and 2025 was built entirely around it. Show the working, then explain the RESPENDING chain in words. The multiplier k=\frac{1}{1-MPC}=\frac{1}{MPS} Use whichever form matches what the question gives you. Final change in real GDP ΔY = Δ(injection) × k The injection is C, I, G or X changing — or, for a tax change, the SPENT portion of it (see the mistake below). ✕A tax cut is not fully spent — a government spending rise is
Government SPENDING (G) is itself the injection — multiply the whole amount straight away. A TAX CUT is different: the household saves part of it immediately, so the injection is only the SPENT portion — tax cut × MPC — and that smaller figure is what gets multiplied by k. Treating a tax cut the same as direct spending overstates its effect, and the 2024 paper built an entire Excellence part around exactly that comparison (infrastructure spending vs an equal-sized tax cut). Real paper — 2025 $9.97b more spending on health and education, MPS = 0.15 Calculate and explain the final effect on real GDP and economic growth. k = 1 / MPS = 1 / 0.15 = 6.67. ΔY = $9.97b × 6.67 ≈ $66.5b. Why: the new spending is income for the people and firms who receive it. They save 15c of every extra dollar (MPS = 0.15) and spend 85c, which becomes someone else’s income in turn — the round of spending and re-spending repeats, shrinking a little each time, until the total increase in real GDP reaches $66.5b. ✓ ΔY ≈ $66.5b. Government spending is a direct, full injection, so the whole $9.97b is multiplied. Real paper — 2024 7.5b tax cut, MPC = 0.83 — compared with equal spending on infrastructure Calculate the final effect on real GDP of the tax cut, and explain why infrastructure spending of the same size would have a larger effect. k = 1 / (1 − MPC) = 1 / 0.17 = 5.88. The tax cut is not spent in full: only 7.5b × 0.83 = 4.525b enters the spending stream in the first round (17% is saved immediately). ΔY = 4.525b × 5.88 ≈ $85.4b for the tax cut. Infrastructure spending of 7.5b is a DIRECT injection with no leakage in the first round, so its full 7.5b is multiplied by 5.88 ≈ 02.9b — a larger final effect than the tax cut, for the same headline amount. ✓ Tax cut ≈ $85.4b; equivalent direct spending ≈ 02.9b. Direct spending injects the full amount immediately; a tax cut leaks part of it to saving first.Injections and withdrawals
- Injections (enter the circular flow from outside households’ own spending): investment (I), government spending (G), export receipts (X).
- Withdrawals (leave it): saving (S), tax (T), import payments (M).
- A rise in ANY injection, or a fall in any withdrawal, is multiplied the same way — export receipts falling shrinks real GDP through exactly the same chain as a tax rise.