The Multiplier Process
The Multiplier
Process.
One person’s expenditure becomes another person’s income. Follow an initial injection through successive spending rounds and see why the total change in output can exceed the original shock.
Observe
Follow the income.
An injection does not
stop with its first recipient.
A €20 million infrastructure project becomes wages, profits and supplier income. Recipients spend part of that income, creating revenue and income elsewhere. Each round is smaller because saving, taxes and imports remove spending from the domestic flow.
Of every additional euro received, how much returns as domestic expenditure—and how much leaks away?
Think
Read the geometric series.
The multiplier is a sequence,
not magic.
With marginal propensity to consume c, the rounds are ΔA, cΔA, c²ΔA and so on. Their converging sum equals the initial injection multiplied by 1/(1−c).
1 − c
Income not used for current consumption.
t
Part of additional income transferred to government.
m
Demand directed toward foreign rather than domestic output.
Analyse
Watch the rounds converge.
Simulate the
income cascade.
Change the initial injection and marginal propensity to consume. The table displays the first eight rounds and compares their cumulative effect with the theoretical total.
Multiplier laboratory
INTERACTIVE SPENDING ROUNDS
Each recipient spends 75% and leaks 25% from the next domestic round.
| Round | New income | Next spending | Leakage |
|---|
Apply
Know when the model weakens.
The realised multiplier depends on
institutions and capacity.
The simple multiplier is larger when domestic spending responses are strong and leakages are small. It becomes weaker when imports, taxes, debt repayment or precautionary saving rise, and when interest rates or prices respond.
Slack domestic economy
Firms have unused capacity, workers are available and supply chains are domestic.
More of the expenditure becomes real output.
Capacity-constrained economy
Production cannot expand easily, imports rise and prices respond.
More of the injection leaks abroad or becomes inflation.
Decide
Calculate the total effect.
What is the predicted
change in equilibrium income?
Autonomous investment increases by €30bn and the marginal propensity to consume is 0.6 in a simple closed economy with no taxes.
MACROECONOMICS · MODULE 05 COMPLETE
You can now trace
macroeconomic propagation.
An autonomous shock becomes a sequence of income and expenditure rounds. Leakages make each round smaller; capacity, prices and institutions determine how much of the theoretical multiplier is realised.
