To calculate the Multiplier Effect (M):
\[ M = \frac{1}{1 - \text{MPC}} \]
Where:
The economics multiplier refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. This concept is a key component of Keynesian economics and illustrates how the economy can amplify the effects of changes in spending. The multiplier effect shows how an initial change in spending leads to a larger change in overall economic activity.
Let's assume the following value:
Step 1: Use the formula:
\[ M = \frac{1}{1 - 0.75} = \frac{1}{0.25} = 4 \]
The Multiplier Effect is 4.
Let's assume the following value:
Step 1: Use the formula:
\[ M = \frac{1}{1 - 0.6} = \frac{1}{0.4} = 2.5 \]
The Multiplier Effect is 2.5.
