Spending multiplier effect

February 25, 2016

Spending multiplier effect

• An initial change in spending (C, Ig, G, Xn) causes a larger change in aggregate spending or Aggregate demand (AD)

-multiplier = change in AD/ change in spending
-multiplier = change in AD/ change in C, I, G or X

Calculations for spending multiplier

• get calculated from MPC or the MPS
• multiplier= 1/r-MPC or 1/MPS
• multipliers are (+) when there is an increase in spending and (-) when there is a decrease

Calculating tax multiplier 

• When the government taxes, the multiplier works in reverse
• Money is leaving the circular flow
• tax multiplier is negative
• =-MPC/1-MPC or -MPC/MPS
• Tax-cut then the multiplier is +, because now there is more in the circular flow