Enter the initial investment and the marginal propensity to consume (MPC) into the calculator to determine the multiplier effect on the economy.
Multiplier Effect Formula
The following formula is used to calculate the multiplier effect:
ME = II / (1 - MPC)
Variables:
- ME is the multiplier effect
- II is the initial investment
- MPC is the marginal propensity to consume
To calculate the multiplier effect, divide the initial investment by the difference between one and the marginal propensity to consume (1 - MPC).
What is the Multiplier Effect?
The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. The concept is a key component of Keynesian economics and illustrates how an initial spending can lead to an increase in income and consumption greater than the initial amount spent.
How to Calculate the Multiplier Effect?
The following steps outline how to calculate the Multiplier Effect:
- First, determine the initial investment (II).
- Next, determine the marginal propensity to consume (MPC).
- Next, gather the formula from above = ME = II / (1 - MPC).
- Finally, calculate the Multiplier Effect (ME).
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Initial Investment (II) = $1,000
Marginal Propensity to Consume (MPC) = 0.75
