Multiplier

Multiplier

Spending Multiplier Effect

A change in spending that comes from (C, Ig, G, X) causes a larger change in aggregate spending or aggregate demand. (AD)

Multiplier = change in AD / change in Spending

Multiplier = change in AD / change in C, Ig, G, or X

Why does this happen?

Expidentures/income flow continuously when sets off spending increase in economy

How to calculate spending multiplier

1/ 1-MPC or 1/MPS

Positive - increase in spending

Negative - decrease in spending

Tax Multiplier

When the government taxes, multiplier works in reverse because the money leaves the flow
- will be negative

Tax Multiplier = - MPC/ 1-MPC or - MPC /  MPS

Tax cut has the reverse effect (a positive effect) because more money is in the circular flow

Change in AD = ( C, Ig, X, G ) X Spending multiplier