Multiplier Effect Flashcards

Flashcards about the Multiplier Effect to help review lecture notes.

Multiplier Effect

Additional shifts in aggregate demand resulting from expansionary fiscal policy.

Multiplier Effect Increase in Government Purchases by $20 Billion

The aggregate-demand curve shifts right by exactly $20 billion.

Multiplier Effect Amplification

Increases in aggregate income stimulate additional spending by consumers.

Marginal Propensity to Consume (MPC)

Fraction of extra income that consumers spend.

Example MPC of 0.80

For every new dollar, 80 cents is consumed and 20 cents is saved.

Multiplier Effect: Government Spending Increase of $20 Billion, MPC = 0.50

Calculate the total effect of increased government spending with an MPC of 0.50, resulting in a $40 billion total effect.

Multiplier Formula

1 / (1 – MPC)

MPC and Multiplier Size

The larger the MPC, the larger the multiplier effect.