Chapter 10 Aggregate Expenditures: The Multiplier, Net Exports, and Government

A multiplier may occur in a variety of ways, impacting different instruments or balances. Quickonomics provides free access to education on economic topics to everyone around the world. Our mission is to empower people to make better decisions for their personal success and the benefit of society. Now, let us take a look at a few examples to understand the practical application of multipliers. The earnings multiplier frames a company’s current stock price in terms of the company’s earnings per share (EPS) of stock.

Module 9: Keynesian and Neoclassical Economics

1. Injections are exports, investments, and government spending because they increase the supply of money flowing through the economy.
2. Only 20 cents of each dollar is cycled into the local economy in the first round.
3. This is because the loan, when drawn on and spent, mostly finishes up as a deposit back in the banking system and is counted as part of money supply.
4. In this simple case, a change in spending of $100 multiplied by the spending multiplier of 10 is equal to a change in GDP of $1,000.

Even though the initial increase in investment was only $500 million, the total increase in real GDP was $2 billion. The increase in one economic factor generated a higher total of other economic variables. Marginal propensity to save (MPS) is the rise in a household’s savings when disposable income increases by a dollar.

The Expenditure Multiplier Effect

The minimum value for an investment multiplier is one, meaning an investment with no net increase in income. The maximum value is theoretically infinite, since there is no upper bound to the returns on an investment. An investment multiplier similarly refers to the concept that any increase in public or private investment has a more than proportionate positive impact on aggregate income and the general economy.

Further reading on Perlego

In an Expenditure-Output Model The power of the multiplier effect is that an increase in expenditure has a larger increase on the equilibrium output. However, the increase in equilibrium output, shown on the horizontal axis, is clearly larger. The last impact (induced impact) highlights the true benefit of multiple effects. Although a single individual received a tax benefit, many companies and their employees benefited. That tip would now be the benefit of the waitstaff who may buy a crafted item at a local market and increase the income of a local artist.

Aggregate Demand and Consumption

This money is used to hire workers, buy materials, and pay for other services. Now, let’s assume that the workers and suppliers spend 80% of their additional income on goods and services (i.e., that’s their marginal propensity which of the given multipliers will cause to consume). This additional spending then generates income for other people, who in turn spend 80% of their income, and so on.

Understanding the multiplier effect is crucial for policymakers, economists, and businesses. By analyzing the potential impact of changes in government spending, taxes, or investment on the overall economy, policymakers can implement effective fiscal policies to stimulate or stabilize economic growth. The multiplier effect is a parameter used by economists and decision-makers to understand the economic impacts of increasing the money flow. Money flow has an effect on national demand, income, and other economic activities.

Changes in the size of the leakages—a change in the marginal propensity to save, the tax rate, or the marginal propensity to import—will change the size of the multiplier. The multiplier effect occurs when an initial injection into the circular flow causes a bigger final increase in real national income. This injection of demand might come for example from a rise in exports, investment or government spending.