3.6.4 (HL)—Keynesian multiplier

The multiplier is the ratio of the final change in national income to an initial autonomous spending change; leakages reduce its size.

Consumption propensity, taxes, saving and imports determine repeated spending rounds.

Apply the multiplier consistently and state assumptions.

If MPC is 0.75 in a simple model, multiplier is 1/(1−0.75)=4; a $10m injection could raise income by$40m in the model.

The calculated result is not a guaranteed real-world effect.

Use $k=1/(1-MPC)$ in the simple two-sector model, or $k=1/(MPS+MPT+MPM)$ when saving, taxation and imports are leakages. The final modelled income change is $\Delta Y=k\times\Delta J$, where $\Delta J$ is an autonomous change in investment, government spending or exports. Example: if $MPS=0.2$, $MPT=0.1$ and $MPM=0.2$, then $k=1/0.5=2$. A $30 million rise in government spending gives a modelled$60 million rise in GDP. Keep propensities and monetary units consistent.