Correct Option
The correct option is 1 and 3 only.
Explanation
The Government Expenditure Multiplier is a key macroeconomic concept within fiscal policy. It measures the impact of a change in government spending on the total equilibrium level of national income or output. The concept relies on the circular flow of income, where one entity's spending becomes another's income.
Statement-wise Analysis
- Statement 1 is Correct: The multiplier is explicitly defined as the ratio of the change in equilibrium output ($\Delta Y$) to the initial change in government spending ($\Delta G$). It quantifies how much the aggregate output shifts for every unit increase or decrease in public expenditure.
- Statement 2 is Incorrect: The value of the government expenditure multiplier is typically greater than 1. This occurs because the initial government spending increases income, which leads to a rise in consumption (induced consumption). This cycle repeats, causing the total increase in output to exceed the initial injection of spending. Mathematically, since the Marginal Propensity to Consume (MPC) is between 0 and 1, the formula $\frac{1}{1 - MPC}$ yields a value greater than 1.
- Statement 3 is Correct: The value of the multiplier is mathematically derived from the Marginal Propensity to Consume (MPC). The MPC determines what fraction of additional income is spent rather than saved. A higher MPC leads to a larger multiplier because more income is recirculated into the economy during each cycle of consumption.
Key Takeaway
The Government Expenditure Multiplier illustrates that fiscal injections can lead to a more than proportionate increase in national income, with the magnitude of this increase depending directly on the Marginal Propensity to Consume (MPC).