MPC = Change in Consumption Change in Income Marginal Propensity to Consume = MPC MPC = 750 / 1000 = 0.75 “Disposable income” Real terms MPC does not equal.

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Presentation transcript:

MPC = Change in Consumption Change in Income Marginal Propensity to Consume = MPC MPC = 750 / 1000 = 0.75 “Disposable income” Real terms MPC does not equal APC

Multiplier = or 1 1-MPC 1 MPS THE MULTIPLIER EFFECT Direct relationship between: Multiplier & MPC Multiplier Effect and the Marginal Propensities

Change in GDP = Multiplier x initial change in spending THE MULTIPLIER EFFECT Multiplier = Change in Real GDP Initial Change in Spending For Example…

THE MULTIPLIER EFFECT Increase in Investment of $5 Second Round Third Round Fourth Round Fifth Round All Other Rounds Total (1) Change in Income (2) Change in Consumption (MPC =.75) (3) Change in Saving (MPS =.25) $ $ $ $20.00 $15.00 $ 5.00

THE MULTIPLIER EFFECT MPCMultiplier MPC and the Multiplier