APMacro: Multiplier


11 Multiplier

When investment spending changes, real GDP changes by more than the initial change in spending. Because spending by one entity is income to another—and that income is then spent to another—an increase in the initial spending multiplies through the economy, causing a greater increase in national output. The multiplier can be calculated in several ways: 1/MPS or 1/(1–MPC) or Change in Real GDP / Initial Change in Spending. To calculate the effect of a change in spending on real GDP: Change in Real GDP = Multiplier x Initial Change in Spending. The higher the marginal propensity to consume, the higher the multiplier, and the greater the effect of changes in investment spending on real GDP.

Arrows-02-june

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