9.1.1—Multiplier process

The multiplier is the ratio of the final change in national income to the initial change in autonomous spending. Each round of extra income creates further spending, but leakages through saving, taxation and imports limit the total.

In a simple model, a higher marginal propensity to consume produces a larger multiplier. The actual effect also depends on spare capacity, prices, interest rates, supply and whether spending crowds out other demand.

If the marginal propensity to consume is 0.75 and the simple closed-economy multiplier is 1/(1−0.75)=4, an initial $10 increase in investment could raise equilibrium income by up to$40 in the stylised model.

The multiplier is not an automatic promise that GDP rises by the textbook number; assumptions and supply constraints matter.