Economics Notes: The Multiplier Effect
1. What is the Multiplier Effect?
When an initial change in spending leads to a greater final increase in
national income.
2. Formula
Multiplier (k) = 1 / Marginal Propensity to Withdraw (MPW)
MPW = MPS (save) + MPT (tax) + MPM (import)
k = 1 / (MPS + MPT + MPM)
3. Example
Government spends £1 billion total income increases by more than £1 →
billion depending on k.
4. Factors Affecting the Multiplier
Propensity to consume vs. save
Tax rates
Import levels
5. Limitations
Time lags in spending effects
Size of leakages
Availability of spare capacity in the economy
6. Policy Use
Helps justify government spending during downturns (Keynesian view)
End of Notes