SPENDING

MULTIPLIER
ARITHMETIC
REVISITED

SPENDING MULTIPLIER
ARITHMETIC
Begins

with a concept called the Marginal Propensity to

Consume (MPC)

Marginal Propensity to Consume (MPC) is the change in

consumption spending resulting from a given change in

income.

SPENDING MULTIPLIER
ARITHMETIC
Conclusion:
Any initial change in spending by the government,
households, or firms creates a chain reaction of further
spending, which causes a greater cumulative change
in aggregate demand.

SPENDING MULTIPLIER
ARITHMETIC
Process based on an infinite geometric series.
The formula is the sum of such a series of numbers is the initial number

times 1/(1-r), where r is the ratio that relates the numbers.

By simply defining r in the infinite series formula as MPC, the spending

multiplier for aggregate demand is expressed as

SPENDING MULTIPLIER
ARITHMETIC
Applying this formula to our example:

If households spend a portion for each extra dollar of income, then the

remaining portion of each dollar is saved.

The Marginal Propensity to Save (MPS) is the change in saving resulting

from a given change in income. Therefore:

MPC + MPS = 1

SPENDING MULTIPLIER
ARITHMETIC
It can be rewritten as:

MPS = 1 MPC
The above spending multiplier formula can be written as:

SPENDING MULTIPLIER
EFFECT
Marginal Propensity to
Consume (MPC)

Marginal Propensity to
Save (MPS)

Spending Multiplier

0.90

0.10

10

0.80

0.20

0.75

0.25

0.67

0.33

0.50

0.50

0.33

0.67

1.5

SPENDING MULTIPLIER
ARITHMETIC
# 1

# 2

# 3

MPS = 1 - MPC

MPS = 1 - MPC

MPS = 1 - MPC

= 1 0.90

= 1 0.80

= 1 0.75

= 0.10

= 0.20

= 0.25

Spending Multiplier =

Spending Multiplier =

Spending Multiplier =

=
= 10

=
=5

=4

SPENDING MULTIPLIER
ARITHMETIC
# 4

# 5

# 6

MPS = 1 - MPC

MPS = 1 - MPC

MPS = 1 - MPC

= 1 0.67

= 1 0.50

= 1 0.33

= 0.33

= 0.50

= 0.67

Spending Multiplier =

Spending Multiplier =

Spending Multiplier =

=
= 3

=
=2

=
1.5