The Spending Multiplier Effect

• An inital change in spending (C,Ig,G,Xn) causes a larger change in Aggregate Spending or Aggregate demand
• Multiplier =CHnage in AD/ Change in spending
• multiplier = Change in Aggregate Demand/ Change in C,Ig,G,Xn

The Spending Multiplier effect

• why does this happen?
• -expenditures and income flow continuously which sets off a spending increase in the economy

Calculating the Spending Multiplier

• The spending multiplier can be calculated from the MPC or the MPS.
• Multiplier = 1/1 -MPC or 1/MPS
• Multipliers are (+) when there is an increase in spending and (-) when there is a decrease in spending

Calculating Tax Multiplier

• When the government taxes the multiplier it works inverse
• why?
• - because how money is leaving the circular flow
• Tax Multiplier (Note : It's Negative)
• -- = -MPC/1-MPS or -MPC/MPS
• If there is a tax-cut, then the multiplier is +, because there is now more money in the circular flow