The Expenditure Multiplier

  1. The Basic Idea of the Multiplier
    The Reverse Multiplier Effect - When Crushing Deflation Destroys America

  • The multiplier is the amount by which a change in any component of autonomous expenditure is magnified or multiplied to determine the change that it generates in equilibrium expenditure and real GDP.
  • The multiplier exists because a change in autonomous expenditure creates a change in disposable income, which leads to additional changes in induced expenditure and disposable income.
  1. The Size of the Multiplier
              Multiplier =
  1. Why is the Multiplier Greater Than 1?
  • The multiplier is greater than 1 because an increase in autonomous expenditure induces further increases in aggregate expenditure—induced expenditure increases.
  1. The Multiplier and the MPC
  • The greater the marginal propensity to consume, the larger is the multiplier. Ignoring the effects of imports and income taxes, the multiplier equals
  1.  Imports and Income Taxes
  • The larger is the marginal propensity to import and the larger is the marginal tax rate (the fraction of a change in real GDP that is paid in income taxes), the smaller is the multiplier.
  • The general formula for the multiplier is
Multiplier =
  1. Business-Cycle Turning Points

  • The forces that bring business-cycle turning points are the swings in autonomous expenditure such as investment and exports. The mechanism that gives momentum to the economy’s new direction is the multiplier.