Module 16 - Multiplier Effect

What is the Multiplier Effect?

- The Multiplier Effect shows how spending is magnified in the economy

What is Marginal Propensity to Consume (MPC)?

- How much people consume (spend) rather than save when there is a change in income

T or F: MPC is always expressed as a fraction (decimal)

True

What is the MPC formula?

Change in consumption/Change in income

What is Marginal Propensity to Save (MPS)?

- How much people save rather than consume (Spend) when there is a change in income

What is the MPS formula?

change in savings/change in income

What is MPS equal to in terms of MPC?

MPS = 1 - MPC

Why is MPS = 1 - MPC?

Because people can either save or consume

What is the formula for Spending Multiplier?

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

What is the formula for Total Change in GDP?

Total Change in GDP = Multiplier x Initial Change in Spending

If the multiplier is 4, how much will an initial increase of $5 in Government Spending increase the GDP?

$20

How much will a decrease of $3 in spending decrease GDP? (Multiplier: 4)

-$12