The Multiplier Effect

What is the multiplier effect?

The multiplier effect is when an initial change in injections/leakages (AD) in the economy has a greater final impact on equilibrium natjonal income

Initial change < final real GDP

What does the multiplier effect illistrate in the economy?

The multiplier effect illustrates how any changes in spending can have a rupple effect throughout the economy, generating additional rounds of economic activity

What is the multiplier effect formula (closed economy)

Multiplier = 1/(1-MPC)

MPC + MPS = 1

What is the multiplier formula ?(extended)

Multiplier = 1/ MPS + MPM + MRT

So: m = 1/MPW

MRT = marginal tax rate on income

What happend to the multiplier value when total withdrawals fall?

When the MPW falls, the value of the multiplier effect increases (reduction in leakages = increased economic activity)

Multiplier and leakages = indirectly proportional