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MULTIPLIER
ARITHMETIC
REVISITED
SPENDING MULTIPLIER
ARITHMETIC
Begins
SPENDING MULTIPLIER
ARITHMETIC
Conclusion:
Any initial change in spending by the government,
households, or firms creates a chain reaction of further
spending, which causes a greater cumulative change
in aggregate demand.
SPENDING MULTIPLIER
ARITHMETIC
Process based on an infinite geometric series.
The formula is the sum of such a series of numbers is the initial number
SPENDING MULTIPLIER
ARITHMETIC
Applying this formula to our example:
If households spend a portion for each extra dollar of income, then the
MPC + MPS = 1
SPENDING MULTIPLIER
ARITHMETIC
It can be rewritten as:
MPS = 1 MPC
The above spending multiplier formula can be written as:
SPENDING MULTIPLIER
EFFECT
Marginal Propensity to
Consume (MPC)
Marginal Propensity to
Save (MPS)
Spending Multiplier
0.90
0.10
10
0.80
0.20
0.75
0.25
0.67
0.33
0.50
0.50
0.33
0.67
1.5
SPENDING MULTIPLIER
ARITHMETIC
# 1
# 2
# 3
MPS = 1 - MPC
MPS = 1 - MPC
MPS = 1 - MPC
= 1 0.90
= 1 0.80
= 1 0.75
= 0.10
= 0.20
= 0.25
Spending Multiplier =
Spending Multiplier =
Spending Multiplier =
=
= 10
=
=5
=4
SPENDING MULTIPLIER
ARITHMETIC
# 4
# 5
# 6
MPS = 1 - MPC
MPS = 1 - MPC
MPS = 1 - MPC
= 1 0.67
= 1 0.50
= 1 0.33
= 0.33
= 0.50
= 0.67
Spending Multiplier =
Spending Multiplier =
Spending Multiplier =
=
= 3
=
=2
=
1.5