Help!! multiplier effect (K) (1 Viewer)

[lilman]

Can someone help explain to me what the multiplier effect is? for ex 'any change in automomous government spending will have a multiplier effect on national income".

Thanks

 

[passion89]

The multiplier effect (K) refers to when the increase in (the change in) income is greater than the increase in investment spending*.

K = change in income / investment spending*
For example, if the change in income is 20 and the change in investment spending is 10, k would be equal to 2.

This can also be written as:

K = 1/1 - (marginal propensity to consume)
K = 1/1-MPC

Or this can be written as
K = 1/ marginal propensity to save
k = 1/MPS

*NB: The multiplier effect works with autonomous changes in spending of all kinds aggregate demand eg: investment, consumption, government, export and import from:
Aggregate Demand = C + I + G + (X-M)

 

[lilman]

thankyou so much

 

[lilkiwicutie89]

hey isnt the multiplier 2.5?
im still quite lost in that concept and how does the deflationary and inflationary gap fit in,..

thanks =P