The multiplier measures how an initial change in spending—such as investment or government spending—affects the total national income. It shows how one person’s spending becomes another person’s income, leading to a chain reaction of further spending in the economy.

Formula: Multiplier (k) = 1 / (1 − MPC) = ΔY / ΔAD

Key features:

• A higher marginal propensity to consume (MPC) leads to a larger multiplier effect.
• The process relies on successive rounds: an injection of money creates income for recipients, who then spend a portion of it.
• Factors that reduce the multiplier, known as leakages, include saving, taxation, and imports. Because part of the money is removed from the cycle at each stage, the multiplier is reduced.
• For example, a multiplier of 2.5 means that an initial £10 billion increase in demand results in a £25 billion increase in the total national income.
• The multiplier effect is a foundation for using fiscal policy to influence economic growth and manage demand.