Multipliers

Multipliers

2-24-17

The spending multiplier effect: An initial change in spending (C, Ig, G, Xn) causes larger change in AS or AD

• Formula for multiplier: change in AD/ change in spending OR change in AD/ change in C, Ig, G, or Xn
• This happens because expenditures and income flow continuously which sets off a spending increase in economy

Calculating spending multiplier

• Formula: 1/ 1- MPC OR 1/MPS

Calculating tax multiplier

• When government taxes, the multiplier works in reverse because now money is leaving circular flow
• Tax multiplier formula: -MPC/1-MPS OR -MPC/MPS
• If tax is cut, multiplier is positive because now more money in circular flow