Page 91 - Macroeconomics. book docx_Neat

Round 3:

Consumption = 0.8 × 80 = 64

Round 4:

Consumption = 0.8 × 64 = 51.2

And so on…Total income increase = 100 + 80 + 64 + 51.2 + …

Formula of the Investment Multiplier: Multiplier=11−MPC\text{Multiplier} =frac{1}{1 -

MPC}Multiplier=1−MPC1

Or: Multiplier=1MPS\text{Multiplier} = frac{1}{MPS}Multiplier=MPS1

Where:

MPC = Marginal Propensity to Consume

MPS = Marginal Propensity to Save

5. Simple Numerical Example

If:

MPC = 0.75

Then:

Multiplier=11−0.75=10.25=4\text{Multiplier} = \frac{1}{1 - 0.75} =
\frac{1}{0.25} = 4Multiplier=1−0.751=0.251=4

If investment increases by 50:

Increase in Income=50×4=200\text{Increase in Income} = 50 × 4 =

200Increase in Income=50×4=200

Small investment → big income effect

9- Relationship Between Multiplier and MPC

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