Final answer:
To calculate the fiscal multiplier, one must use the Marginal Propensity to Consume (MPC) to assess how changes in spending and tax policy can affect real GDP. The spending multiplier is typically larger than the tax multiplier, as government spending directly injects money into the economy, while the effects of taxation changes depend on consumer spending behavior.
Step-by-step explanation:
To calculate the fiscal multiplier for spending and taxation, you need to understand the concept of Marginal Propensity to Consume (MPC) which indicates how much of every dollar received will be spent. The multiplier is essentially 1/(1-MPC). For example, if the MPC is 0.8, then 80% of every dollar received is spent, which gives a multiplier of 1/(1-0.8) = 5. This means that every dollar of autonomous spending generates an extra five dollars in real GDP.
The effect of a tax change on autonomous spending also needs to be considered. If taxes are reduced by one dollar, and the MPC is 0.8, the increase in spending will not be the full dollar but only 80% of it, because that's the amount consumers will spend out of the extra dollar they have after taxes. So the multiplier effect for tax changes is slightly different and typically smaller than for direct spending changes because part of the tax savings may not be immediately spent.
The difference in multipliers for spending vs. taxation is tied to their differing impacts on autonomous spending. Government spending injects money directly into the economy, thus has a more immediate and often stronger effect on the multiplier. Taxation indirectly influences economic activity by altering disposable income, and the effect may be tempered by how much of the tax change is actually spent.