Multiplier

Discipline: Economics

Multiplier focuses on the relationship between spending and consumption. It is also referred to as expenditure multiplier.

The concept holds that a spending, regardless of whether initiated by the government, corporations or households, will trigger the national income. Expenditure multiplier does not differentiate between consumption and investment spendings. This effect is called the multiplier effect.

In mathematical terms, the multiplier effect is calculated as follows:

Multiplier = 1 / (1 - MPC) = 1 / MPS; where:

MPC = the marginal propensity to consume, and
MPS = the marginal propensity to save.

According to this formula, if we assume that MPC = 0.25, then MPS = 0.75, and Multiplier = 1.33.

What this means is: An increase of 2 million dollars in spending will trigger an increase of (2 x 1.33) 2.66 million dollars in income.

Also see: multiplier-accelerator

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