The simple multiplier

• The Marginal Propensity to Consume (MPC) is
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• the proportion of the any extra dollar earned that is consumed.

  • Formula: ==Change in consumption ÷ Change in income==

• this ‘extra income’ is an additional injection into an economy.

• The Marginal Propensity to Save (MPS) is
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• the proportion of the extra dollar earned that is saved.

  • Formula: ==Change in savings ÷ Change in income==

• MPS + MPC = 1

  • as every extra dollar earned is either spent or saved.

• The multiplier is defined as
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• the proportional increase in national income, due to an increase in AD

  • Formula: $K=\frac{1}{1-MPC}=\frac{1}{MPS}$
    • $K\ast$change of income = new income