Enter the marginal propensity to consume or the marginal propensity to save into the calculator to determine the spending multiplier.
Spending Multiplier Formula
The following two formulas are used to calculate the spending multiplier.
SM = 1/ (1-MPC)
SM = 1/MPS
- Where SM is the spending multiplier
- MPC is the marginal propensity to consume
- MPS is the marginal propensity to save
Spending Multiplier Definition
A spending multiplier is defined as the inverse of a person’s marginal propensity to save.
Spending Multiplier Example
How to calculate a spending multiplier?
- First, determine the MPC.
Calculate the marginal propensity to consume. For this formula, we will say this value is .50.
- Next, calculate the spending multiplier.
Using the formula the spending multiplier is found to be 1/ (1-.50) = 2.
The spending multiplier is the multiple by which the GDP either increases or decreases in response to changes in spending.