Spending and Tax Multiplier Effect(2/24)

Spending and Tax Multiplier Effect(2/24)

Spending Multiplier

• an initial change in spending (,Ig,G,Xn) causes a larger change in aggregate spending or AD
• multiplier = ΔAD/ΔC,Ig,G,Xn
• this is due to expenditures and income flow continuously when sets off a spending increase in the economy
• Spending Multiplier = 1/(1 - MPC) or 1/MPS
• (+) is increase in spending
• (-) is decrease in spending

 Tax Multiplier

• when the gov't taxes, multiplier works in reverse since money in leaving the circular flow
• Tax Multiplier = (- MPC/(1 - MPC)) or (- MPC/MPS)
• if there's a tax cut, the multiplier is positive due to more money in the circular flow