3.12 - Keynesian multiplier, marginal propensities

Keynesian multiplier

• quantifies the effect of an initial change in spending on overall economic activity

multiplier = change in rGDP/ initial change in expenditure

or

multiplier = 1/ 1-MPC

or

multiplier = 1/ (MPS + MPT + MPM)

marginal propensity to consume MPC

fraction of additional income that households spend on consumption od domestically produced goods and services

• eg. if increase in national income is 10 milion $, and MPC is 3/4, then 7.5 milion is consumption expenditure

marginal propensity to save MPS

fraction of additional income that households save rather than spend on consumption.

marginal propensity to tax MPT

fraction of additional income that households pay in taxes instead of spending or saving.

marginal propensity to import MPM

fraction of additional income that households spend on imported goods and services.

total marginal propensities

1 = MPC + MPS + MPT + MPM

autonomous spending

spending not caused by a change in income

induced spending

spending caused by a change in income