1. What is the Expenditure Multiplier?

The expenditure multiplier measures how much total spending increases for each dollar of initial spending in the economy. It's a key concept in Keynesian economics that shows the ripple effect of spending through the economy.

2. How Does the Calculator Work?

The calculator uses the expenditure multiplier formula:

Where:

• \( MPC \) — Marginal propensity to consume (fraction of additional income that is spent)

Explanation: The multiplier effect occurs because one person's spending becomes another person's income, which is then partially spent again, creating a chain reaction.

3. Importance of the Multiplier

Details: Understanding the multiplier helps policymakers estimate the impact of fiscal policy changes (like government spending or tax cuts) on overall economic activity.

4. Using the Calculator

Tips: Enter the marginal propensity to consume as a decimal between 0 and 1 (e.g., 0.8 for 80%). The MPC must be less than 1 for the multiplier to work.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical MPC value?
A: MPC typically ranges between 0.6 and 0.9 in most economies, with higher values in consumer-driven economies.

Q2: Can the multiplier be less than 1?
A: No, the expenditure multiplier is always greater than 1 when MPC is between 0 and 1.

Q3: What affects the size of the multiplier?
A: The multiplier increases with higher MPC, and decreases when accounting for taxes, imports, or inflation.

Q4: How does this relate to the tax multiplier?
A: The tax multiplier is typically smaller than the expenditure multiplier because not all tax changes affect spending.

Q5: Are there limitations to this simple multiplier?
A: Yes, more complex models account for leakages (savings, taxes, imports) and price level changes that reduce the multiplier effect.