Multiplier

The 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
• Δ in AD/ Δ ( C. IG. G. Xn) 

why does this happen? 

- expenditures and income flow continuously which sets off a spending increase in an economy

Calculating the spending multiplier

• the spending from the multiplier can be calculated from the MPC or the MPS

- multiplier= 1/1 . MPC or 1/ MPS

- multiplier are (+) when there is an increase in spending and (-) when there is a decrease 

Calculating tax multiplier

When government taxes, multiplier works in reverse. This is because money is leaving the circular flow.

- tax multiplier( note: is negative) 

Tax Multiplier =      -MPC

                           _______

                               MPS

- if there is a tax cut then the multiplier is (+), because there is now more money in the circular flow