2/24/17: Multipliers

• The Spending Multiplier Effect
• An initial change in spending (C, Ig, G, Xn) causes a larger change in Aggregate Spending or Aggregate Demand.
• Multiplier = Change in AD / Change in Spending 
• Multiplier = Change in AD / Change in C, Ig, G or Xn
• 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 positive (+) when there is an increase in spending & negative (-) when there is a decrease.

• Calculating the Tax Multiplier
• When the government taxes, the multiplier works in reverse.
• Why?
• Because now money is leaving circular flow.
• Tax Multiplier (Note: it's negative)
• -MPC / 1-MPC or -MPC / MPS
• If there is a tax cut, then the multiplier is positive (+) now, because there is now more money in the circular flow.