1) The multiplier concept was developed by Keynes to show how an initial change in autonomous spending (investment or government spending) can have a multiplied effect on aggregate income and output. 2) The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. It represents the total change in income generated by an initial $1 change in autonomous spending. 3) There are different multipliers for different types of fiscal policy changes. The government spending multiplier is typically greater than 1, while the tax multiplier is usually between 0-1, representing a contractionary effect on income from a tax increase.

1. Multiplier
Dr.Rosewine Joy
Assistant professor
School of Management
Presidency University, Bangalore
rosewinejoy@presidencyuniversity.in
Paper :Macro Economics for Managers
Course and Batch :MBA 2019-21
Even semester :2021

2. Evolution of Multiplier Concept
• The Great Depression 1929-
1940s
• Keynesian policies – Reviving
the Aggregate Demand
• The Keynesian Model for
Income determination
AS=AD
Y=C+I+G+NX

4. Keynes Argument for AD revival
If economy is equilibrium , we could write
AD=AS
Argument : Possible only if consumer plan to
consume and save and producer plan to
produce and invest is same
Keynes argue its possible only in one level of
national income

5. Model of Income Determination
AD = AS
Consumption(C)+ Investment(I) = Consumption(C) + Saving(S)
C+I =Y (Income )
Two approaches to explain the Keynesian theory of national
income determination, viz.,
(i) AD-AS approach, and
(ii) S-I approach.

6. The Multiplier
– The ratio of the change in the equilibrium level of
real national income to the change in autonomous
expenditures
– The number by which a change in autonomous
real investment or autonomous real consumption
is multiplied to get the change in equilibrium real
GDP

7. The Multiplier (cont'd)
The multiplier formula
• Recall Consumption function can be written as C=a +bY ;where
“a” is autonomous consumptions ,b =MPC (Marginal
propensity to consume )
• MPC+MPS =1
Multiplier = denoted as K
Multiplier(K) =
1
1 -MPC
=
1
MPS

8. The Multiplier (cont'd)
• Measuring the change in
equilibrium income from a
change in autonomous spending
12-8
Change in equilibrium real GDP =
Multiplier x Change in autonomous spending

10. Table 12-3 The Multiplier Process
12-10

11. The Multiplier (cont'd)
 Significance of the
multiplier
It is possible that a
relatively small
change in
consumption or
investment can
trigger a much larger
change in real GDP.
12-11

12. Multiplier concept explain with help of Axis bank
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13. The Determination of Equilibrium
Output
• Equilibrium in the goods & services market
requires that, actual agg. exp. (or output/
supply) = planned agg. exp. (or demand)
• Y = C(YD) + I + G + NX
• Consider I as planned investment, consider G
and NX to be autonomous expenditure
• So: Y= C0+C1(y-t)+ I + G + NX

14. The Determination of Equilibrium
Output
• Equilibrium in the goods & services market
requires that, actual agg. exp. (or output/
supply) = planned agg. exp. (or demand)
• Y = C(YD) + I + G + NX
• Consider I as planned investment, consider G
and NX to be autonomous expenditure
• So: Y= C0+C1(y-t)+ I + G + NX

17. If the investment community increases its spending, incomes and
consumption will spiral upward in multiple rounds of earning
and spending.
Once the process has played itself out, the economy’s
equilibrium income will be higher by some multiple of the initial
investment spending.
Y = [ 1/(1 – b )] I
1/(1 – b ) is the investment multiplier.
We can say, then, that if investment spending increases by I,
then the equilibrium level of income will increase by
1/(1 – b ) times that increase.
MPC and the Investment Multiplier

18. Including Government in NI
equilibrium
• AD = C+I+G
• AS=C+S+T
• AD=AS = Equilibrium condition
• C = a + b(Y – T) ;T=Tax …….1
• Y = a + b(Y – T) + I + G ; G = Government Expenditure
……..2
• Y=1/1-b(a-bT+I+G)…….3
Sample question if C = 100 + 0.75Yd ;I= 200 ; G=T=100 ,find equilibrium Income and
multiplier

19. Fiscal Policy at Work: Multiplier Effects
At this point, we are assuming that the government
controls G and T. In this section, we will review three
multipliers:
Government spending multiplier
Tax multiplier
Balanced-budget multiplier

20. FISCAL POLICY AT WORK: MULTIPLIER EFFECTS
MPS
MPC
1
-
1
1
multiplier
spending
government 

government spending multiplier The ratio of the
change in the equilibrium level of output to a
change in government spending = Y
G


1/(1 – b ) is the government expenditure multiplier.
We can say, then, that if government spending increases by G, then the
equilibrium level of income will increase by 1/(1 – b ) times that increase.

21. THE TAX MULTIPLIER
tax multiplier The ratio of change in the equilibrium level of
output to a change in taxes =
The multiplier for a change in taxes is not the same as the multiplier for a
change in government spending.
FISCAL POLICY AT WORK: MULTIPLIER EFFECTS
Y
T







 










MPS
MPC
MPC
MPC
1
multiplier
tax
(1 – b)Y = -bT
Y = [ -b/(1 – b )] T
-b/(1 – b ) is the Tax Multiplier.
So, that if the tax take increases by T, the equilibrium level of income will
increase by -b/(1 – b ) times that increase---which is to say that income will
decrease by b/(1 - b) time the increase in taxes.

22. THE BALANCED-BUDGET MULTIPLIER
balanced-budget multiplier The ratio of change in
the equilibrium level of output to a change in
government spending where the change in government
spending is balanced by a change in taxes so as not to
create any deficit.
The balanced-budget multiplier is equal to 1: The
change in Y resulting from the change in G and the
equal change in T is exactly the same size as the initial
change in G or T itself.
FISCAL POLICY AT WORK: MULTIPLIER EFFECTS
1
multiplier
budget
balanced 

23. FISCAL POLICY AT WORK:
MULTIPLIER EFFECTS
Summary of Fiscal Policy Multipliers
POLICY STIMULUS MULTIPLIER
FINAL IMPACT ON
EQUILIBRIUM Y
Government-
spending
multiplier
Increase or decrease in the
level of government
purchases:
Tax multiplier Increase or decrease in the
level of net taxes:
Balanced-
budget
multiplier
Simultaneous balanced-budget
increase or decrease in the
level of government purchases
and net taxes:
1
1
MPS
 MPC
MPS
G
MPS

1
T
MPC
MPS


G
G
T
 
G T


24. Limitations of Multiplier
• Leakages from the Income Stream
(i) Payment of the past debts
ii) Purchase of existing wealth
(iii) Import of goods and services
• Non-availability of Consumer Goods and Services
• Full Employment Situation