Multiplier Effect Calculator

Formula

The formula to calculate the Multiplier Effect (ME) is:

\[ ME = \frac{II}{1 - MPC} \]

Where:

$ ME $ is the Multiplier Effect
$ II $ is the Initial Investment ($)
$ MPC $ is the Marginal Propensity to Consume (a value between 0 and 1)

What is the Multiplier Effect?

The multiplier effect refers to the proportional increase or decrease in final income that results from an injection or withdrawal of spending. In Keynesian economics, it illustrates how an initial amount of spending can lead to a larger increase in income and consumption. For example, if the government spends money on infrastructure, the workers and companies involved will receive income, which they will then spend, leading to further economic activity and income generation.

Example Calculation

Let's consider an example:

Initial Investment (II): $1,000
Marginal Propensity to Consume (MPC): 0.8

Using the formula to calculate the Multiplier Effect:

\[ ME = \frac{1000}{1 - 0.8} = \frac{1000}{0.2} = 5000 \, \text{dollars} \]

This means that an initial investment of $1,000 with an MPC of 0.8 results in a multiplier effect of $5,000.