1. 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

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

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

4. 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) $ 5.00 3.75 2.81 2.11 1.58 4.75 $ 3.75 2.81 2.11 1.58 1.19 3.56 $ 1.25.94.70.53.39 1.19 $20.00 $15.00 $ 5.00

5. THE MULTIPLIER EFFECT.9.8.75.67.5 10 5 4 3 2 MPCMultiplier MPC and the Multiplier