MPC = Change in Consumption Change in Income

Marginal Propensity to Consume =MPC

MPC = 750 / 1000 = 0.75 • “Disposable income”•Real terms•MPC does not equal APC

Multiplier = or 1

1-MPC

1

MPS

THE MULTIPLIER EFFECT

Direct relationship between: Multiplier & MPC

Multiplier Effect and the Marginal Propensities

Changein GDP =Multiplier x initial change

in spending

THE MULTIPLIER EFFECT

Multiplier =Change in Real GDP

Initial Change in Spending

For Example…

THE MULTIPLIER EFFECT

Increase in Investment of $5

Second Round

Third Round

Fourth Round

Fifth Round

All Other Rounds

Total

(1)Change in

Income

(2)Change in

Consumption(MPC = .75)

(3)Change in

Saving(MPS = .25)

$ 5.00

3.75

2.81

2.11

1.58

4.75

$ 3.75

2.81

2.11

1.58

1.19

3.56

$ 1.25

.94

.70

.53

.39

1.19

$20.00 $15.00 $ 5.00

THE MULTIPLIER EFFECT

.9

.8

.75

.67

.5

10

5

4

3

2

MPC Multiplier

MPC and the Multiplier