The Multiplier Effect

MPC + MPW = ?

• MPS

• 1

• 0

• The Multiplier

MPW = ?

• MPT

• MPC - 1

• The Multiplier

• MPT+MPS+MPM

Marginal Propensity to Consume

• The average amount of income a comsumer spends on goods and services

• The proportion of all of their income a consumer spends

• The proportion of any additional income a consumer will spend on goods and services

• The amount the initial round of spending is multiplied by

MPS = 0.2 MPT = 0.1 MPM = 0.3

MPC = ?

• 0.2

• 0.6

• 1.4

• 0.4

MPC = 0.5 MPT = 0.1 MPM = 0.1

MPS = ?

• 0.3

• 0.1

• 1

• 0

What is K?

• Capital

• Withdrawals

• The Multiplier

The bigger MPC....

• The bigger MPS

• The smaller MPT

• The bigger the initial shift in AD

• The bigger the multiplier

K = ?

• 1 / (1-MPS)

• (1-MPC)

• MPC + MPS

• 1 / (1-MPC)

1 / (1-MPC) ?

• 1 / MPW

• 1

• MPW

MPS = 0.5 MPT = 0.05 MPM = 0.15

The initial injection is $1bn. How big is the overall effect?

• $1bn

• $4bn

• $0.4bn

• $1.66 bn