February 24, 2017

A multiplier is an initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending, or Aggregate Demand m(AD).

The formula for multipliers

• change in AD / change in spending. 

The multiplier effect occurs because expenditures and income flow continuously which sets off a spending increase in the economy.

The Spending Multiplier can be calculated from the MPC or the MPS.

• Multiplier = 1 / (1-MPC)  or 1 / MPS
• Multipliers are (+) where there is an increase in spending and (-) when there is a decrease; pretty straight forward.

Calculating the Tax Multiplier

• When the government taxes, the multiplier works in reverse because the money leaves the circular flow.
• -MPC / (1-MPC)     OR    -MPC/MPS
• If there is a tax CUT, the multiplier is - because there will be more money in the circular flow.