2.4.4: The multiplier

• The multiplier effect occurs when an initial injection into the circular flow of income causes a bigger final increase in real national income
• The multiplier effect happens because one agent's spending is another agent's income. When new jobs are created using government money, the workers who get paid then spend the same money in the economy
• Negative multiplier: When an initial withdrawal leads to an even bigger drop in real GDP
• Multiplier formula: Final change in real GDP / Initial injection
• Multiplier formula: 1 / 1 - Marginal propensity to consume
• Multiplier formula: 1 / Marginal propensity to withdraw
• MPC + MPW always equals 1
• Generally, developing economies have higher multiplier coefficients than developed economies
• There is a time lag between the initial injection and full effect, as people will not spend the money immediately
• The multiplier is higher when an economy has a large MPC and a lot of spare capacity