February 24, 2017

Multiplier

The Spending Multiplier Effect: An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or aggregate demand

Multiplier = Change in AD / Change in Spending (C, Ig, G, Xn)

• Why: expenditures and income flow continuously which sends off a spending increase in the economy

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

Increase in Spending = +

Decrease in Spending = - 

Tax Multiplier: When government taxes, multiplier works in reverse

• Why: Now money is leaving the circular flow

Tax Multiplier = -MPC / 1 - MPC

or

-MPC / MPS

• Tax Cut = +
• Now more money in the circular flow