MPC/MPS Multipliers

The Spending Multiplier Effect - An initial change in spending causes a larger change in aggregate or aggregate demand

- Multiplier = Change in AD / Change in Spending

- Multiplier = Change in AD / Change in C, I, G or Xn

Why It Happens? - Because expenditures and income flow continuously which sets off a spending increase in the economy.

Calculating the Spending Multiplier

Multiplier = 1/1 - MPC or  1/MPS

-Multipliers are (+ )when there is an increase in spending and (-) when there is a decrease.

Tax Multiplier =  -MPC / 1 - MPC or  -MPC/MPS

- When the gov taxes, the multiplier works in reverse because money is how leaving the circular flow

- If there is a tax cut, then the multiplier is (+) because there is more money in the circular flow