C3 HANDOUT (multiplier)

Summary formula for aggregate demand multiplier

In the case of autonomous or In the case of induced tax

constant tax or lump sump tax
1.Investment multiplier 1.Investment multiplier
ki = 1 ki = 1
(1-b) (1-b + bt)
2. Government expenditure 2. Government expenditure
multiplier multiplier
kg = 1 kg = 1
(1-b) (1- b + bt)
3. Tax multiplier 3. Tax multiplier
kt = -b kt = -b
(1 – b) (1 – b + bt)
4. Import multiplier 4. Import multiplier
km = -1 km = -1
(1 – b + m) (1 – b + m + bt)
5. Transfer payment multiplier 5. Transfer payment multiplier
ktr = b ktr = b
(1 – b) (1 – b + bt)
6. Balanced budget multiplier 6. Balanced budget multiplier
kb = (1 – b) = 1 kb = (1 – b)
(1 – b) (1 – b + bt)

ECO211/NORANITA/ECONOMICS LECTURER Page 1

 C3 HANDOUT (multiplier)

Example:

Finding the new national equilibrium using the investment

multiplier

Given MPC = 0.75

I = 50
Initial income equilibrium (at break even) = 400

Solution:

ki = ∆Y
∆I
ki = 1/MPS
ki = 1/(1-MPC)
ki = 1/(1- b)
ki = 1/(1- 0.75)
ki = 1/0.25
ki = 4 the multiplier 4 means that aggregate output will
Increases 4 times the increase in investment spending

ki = ∆Y
∆I
∆Y = ki
∆I
∆Y = ki (∆I)
= 4 (50)
= 200

New Ye = Y + ∆Y
= 400 + 200
= 600

ECO211/NORANITA/ECONOMICS LECTURER Page 2