The Multiplier

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Feb 20, 2024

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Linenberger 1 Gabriela Linenberger Dr. Prera EonS 102 Assignment 3 The Multiplier Economics relies heavily on the multiplier effect to explain how changes in expenditure or investment affect overall economic output. It provides a numerical value of the magnified expected increase in income per dollar of investment. However, the multiplier will be smaller if people save rather than spend their stimulus checks. An economic concept known as the multiplier effect quantifies the potential impact of changing expenditure or investment on the final level of economic output. It refers to the proportional amount of increase or decrease in final income that results from an injection or withdrawal of spending. An increase in autonomous spending leads to a larger increase in real GDP. Autonomous spending is spending that does not change with alterations in income or output. The multiplier effect provides a numerical value or estimate of a magnified expected increase in income per dollar of investment. To calculate the multiplier effect, you can use the formula K = 1 / (1 - MPC). You first need to calculate the marginal propensity to consume, or the MPC, the proportion of savings to expenditures for each dollar generated by a business or economy. If consumers were to spend $0.17 for every dollar they earn, the MPC would be 0.17/1 or 0.17. Using this example, the formula would be K = 1 / (1 - 0.17), giving you a multiplier of 1.20.

Linenberger 2 To understand the multiplier effect, we can imagine if the government were to inject 10 million into the economy. This additional spending increases revenue for businesses, which in turn drives up consumer spending. The multiplier effect is the proportional amount of increase in final income that results from this. The multiplier will be smaller if people save rather than spend their stimulus checks because saving does not generate additional income or consumption spending, which is necessary for the multiplier effect to occur. Therefore, the multiplier effect is more effective when people spend their money rather than save it. The multiplier effect is a fundamental concept in economics that measures the impact of a change in investment or spending on final economic output. It provides a numerical value of the magnified expected increase in income per dollar of investment, working better when people spend their money rather than saving it. Citations  Ganti, A. (2023, May 26). What is the multiplier effect? formula and example. Investopedia. https://www.investopedia.com/terms/m/multipliereffect.asp  Lumen Learning. (n.d.). The Expenditure Multiplier Effect | Macroeconomics. https://courses.lumenlearning.com/wm-macroeconomics/chapter/the-expenditure- multiplier-effect/  Fernando, J. (2022, December 8). Investment Multiplier: Definition, example, formula to calculate. Investopedia. https://www.investopedia.com/terms/i/investment-multiplier.asp

Linenberger 3  The Economist. (2020, December 10). How much economic stimulus does America actually need? The Economist. https://www.economist.com/united- states/2020/12/12/how-much-economic-stimulus-does-america-actually-need  Economic growth: The Multiplier Effect: Fueling Economic Growth - FasterCapital. (n.d.). FasterCapital. https://fastercapital.com/content/Economic- growth--The-Multiplier-Effect--Fueling-Economic-Growth.html  indeed editorial team (Ed.). (2022, August 8). What Is the Multiplier Effect and How Do You Calculate It? Indeed. https://www.indeed.com/career-advice/career- development/multiplier-effect

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