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Expenditure Multipliers

The expenditure multiplier is the measure of the change in aggregate production caused by changes in autonomous expenditure¹. It is the inverse of one minus the slope of the aggregate expenditure line. The expenditure multiplier shows how a small change in expenditure can create larger changes in aggregate output.  Expenditure multipliers can be separated into simple expenditure multipliers and complex expenditure multipliers. Only induced consumption is in the simple expenditure multiplier, while the complex expenditure multiplier includes other induced variables. The multiplier will be greater than 1.0 because a change in autonomous expenditure will change induced expenditure.

An expedniture multiplier is a crucial part of Keynsian economics and the usefulness of fiscal policy to stimulate sustainable economic growth. Consider an individual consumer that has been given $100 to spend. When he spends it, it becomes the income of another individual. This second consumer will save a portion and spend a portion - for example he spends 40% of it. Assuming that all individuals in this economy have the same marginal propensity to consume of 40%, then this process continues. In this simple multiplier, we find that for every $100 injected into the economy, the change in GDP will end up being approximately $167. So even if the government has to eventually repay the $100 through taxation, the economy still benefits through fiscal policy. 

Complex expenditure multipliers have different combinations of induced components. Induced consumption, investment, and government purchases all raise the value of the expenditure multiplier, while induced taxes and imports decrease the expenditure multiplier’s value¹.

 

References:

1. Expenditure Multiplier. Retrieved from www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=expenditures+multiplier

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