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.