Unit III The Spending Multiplier Effect
An initial change in spending (C, IG, G, Xn) causes a larger change in any aggregate Spending,or Aggregate Demand (AD).
Multiplier = Change in AD / Change in Spending-Multiplier = Change in AD / Change in C, I, G, or Xn
- Calculating the Spending Multiplier:
-The Spending Multiplier can be calculated from the MPC or the MPS.
-Spending Multiplier = 1 / 1 - MPC or 1 / MPS-Spending Multipliers are (+) when there is an increase spending and (-) when there is a decrease in spending.
- Calculating the Tax Multiplier:
-When the government taxes, the multiplier works increase
-Why? Because now $ is leaving the circular flow.
-Tax Multiplier ( note: it’s negative) -Tax Multiplier = -MPC / 1 - MPC or -MPC / MPS
-If there is a tax -CUT, then the multiplier is (+), because there is now more $ in the circular flow.
The spending multiplier effect confused me a lot when it came to the calculations but reading over your blog twice, now I know what is being divided and subtracted. Thank you! The government is also very involved in the tax multiplier!
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