Expenditure multiplier

Expenditure multiplier

Equation (3.28) states that the equilibrium level of national income, Ye , is a multiple of
C 0  I 0 . That is,

1
Ye  . (C 0  I 0 )   . (C 0  I 0 )
1 b

where the multiple is,

1
 (3.30)
1 b

The multiple,  represents the expenditure multiplier, (pronounce  as ‘alpha’).

The equilibrium level of national income increases or decreases as the size of  increases or
1
decreases. In this example, since   , ( is seen to depend on b only), the easiest way
1 b
to ‘observe’ the relationship between  and b is to take several values of b, within the range,
0 < b < 1, and calculate the corresponding values of , such as those given in Table 3.1.

Table 3.1 Relationship between the expenditure multiplier and MPC, b

b 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90

 1.11 1.25 1.43 1.67 2.00 2.50 3.33 5.00 10.00

From the table it is observed that as b increases over the range, 0 < b < 1,  increases.
Observe that changes in b are accompanied by even greater changes in . For example, when
b increases from 0.8 to 0.9,  increases from 5 to 10. Worked Example 3.17 examines the
implication of this on the equilibrium level of national income.

© John Wiley and Sons 2013

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