Multipliers

Multipliers

• multiplier effect: a small change in spending causes a larger change in GDP

• A $1 increase in spending can cause more than $1 increase in GDP because spending creates income for others, who also spend

• autonomous spending: spending not caused by a rise in income (e.g., gov. building a bridge or a company building a factory)

Tax Multipliers, MPC, MPS

• MPC (Marginal Propensity to Consumer): fraction of additional income that is spent

  • ex: If MPC = 0.75, you spend $0.75 of every extra $1

• MPC = change in spending/change in income

• MPS (Marginal Propensity to Save): fraction of additional income that is saved. MPC + MPS = 1

• MPS = 1 - MPC

• expenditure multiplier: how much GDP changes when autonomous spending changes

• Expenditure/Spending Multiplier = 1/(1-MPC)

• tax multiplier: tells how GDP changes with tax changes

• Tax Multiplier = -MPC/MPS

• Final GDP Impact = (any) multiplier x autonomous change