Expenditure Multiplier, explained.
The simple expenditure multiplier relates an autonomous spending change to equilibrium income in a model with specified spending feedback and leakages.
Why it happens
Each displayed round spends the initial amount times MPC to the round index. With only saving as a leakage, the infinite geometric total is initial spending divided by one minus MPC.
The simple expenditure multiplier relates an autonomous spending change to equilibrium income in a model with specified spending feedback and leakages.
Read the result
Displayed rounds form a partial geometric sum. The infinite total follows the declared leakages and fixed-price assumptions rather than an estimated policy effect.
A worked example
Trace twenty units through a simple spending chain
Set initial spending twenty and marginal propensity to consume 0.6.
Add rounds of twelve, 7.2 and subsequent smaller amounts while tracking the partial total.
Compare with the model limit fifty without calling that number a measured national fiscal multiplier.
OPTIONAL DEEPER DETAILGo deeper: inside the model
Inside this model
Each displayed round spends the initial amount times MPC to the round index. With only saving as a leakage, the infinite geometric total is initial spending divided by one minus MPC.
Where this idea is useful
A practical use
Ask which leakages and resource constraints a multiplier claim includes before transferring it to a real economy.
A common misconception
“Every economy must have multiplier one divided by one minus MPC.”
That formula belongs to a restrictive expenditure model. Taxes, imports, prices, capacity and financing conditions change the feedback and empirical outcome.
What this explanation leaves out
- Fixed prices and the absence of taxes, imports, interest effects and capacity limits are assumptions. The geometric sum is not an empirical fiscal multiplier or a national-income forecast.
Why does another round never exceed the previous one here?
MPC is constrained below one, so each induced spending round is a smaller fraction of the last.
Which leakages and resource limits were excluded from the multiplier being quoted?
Associated thinkers
Associations marked provisional are awaiting source review.
Further reading
Explore the original research or the teaching reference behind this experiment.