A multiplier is a factor in economics that proportionally augments or increases other related variables when applied. Multipliers are commonly used in 澳洲幸运5官方开奖结果体彩网:macroeconomics, the study of the e𒆙conomy as a whole. The Keynesian multip𓄧lier demonstrates that the economy will flourish as the government increases spending.

What Is the Keynesian Multiplier?

The British economist 澳洲幸运5官方开奖结果体彩网:John Maynard Keynes formally introduced the concept of the multiplier in his "The G♒eneral Theory of Employment, Interest, and Money" in 1936. 

Keynes cited a lack of aggregate demand during the 澳洲幸运5官方开奖结果体彩网:Great Depression and argued that government spending and fiscal stimulus could create a “澳洲幸运5官方开奖结果体彩网:multiplier effect." Any form of government spending could lead to cycles of economic prosperity and increased employment, raising 澳洲幸运5官方开奖结果体彩网:gross domestic product (GDP) to levels higher than the cost.

Aggregate Demand and Consumption

Y=C+I+G

Where:

• Y=Aggregate demand 
• C=Consumer demand
  
• I=Investment demand
  
• G=Government demand

Keynes also introduced the concept of the 澳洲幸运5官方开奖结果体彩网:consumption function:

C=mY

Where:

• m= the 澳洲幸运5官方开奖结果体彩网:marginal propensity to consume (MPC) with m<1.
• Assume it is estimated at .75.

As consumers earn additional income, they spend 75% and save 25%. Investment demand was primarily determined by entrepreneurial spirits, interest rates, and current business conditions, while government demand was determined by the fiscal decisions made by the government.

In this framework, aggregate demand🐠 is expr🙈essed as:

• Y=C+I+G=mY+I+G

Solving this expression for Y results in:

Y=(I+G)/(1-m)

Where the term 1/(1-m) is the Keynesian income “multiplier.” With m=.75, the multiplier is 

1/(1-.75)=4

If Y falls due to a problem with Investment spending, the government can increase aggregate demand by🉐 increasing G.

If m=.75, then the multiplier is 4, indicating a 1-dollar increase in G. All other things being equal will result in an increase in income of 4 dollars in Y.

Keynesian Multiplier Example

Assume a $100 million government construction project pays $50 million in pure 澳洲幸运5官方开奖结果体彩网:labor costs. The workers take that $50 million and, minus the average saving rate, spend it at various businesses. These businesses now have more money to hire new employees to make more products, leading to another round of spending. One dollar of government spending will generate more than a dollar in 澳洲幸运5官方开奖结果体彩网:economic growth. This idea was at the core of the New Deal.

Keynesians wanted to tax savings to encourage people to spend more. The Keynesian model, developed by British economist 澳洲幸运5官方开奖结果体彩网:John Maynard Keynes, arbitrarily separated private savings and investment into two separate funcꦿtions, showing t💝he savings as a drain on the economy.

The Bottom Line

Keynesian economics assumes t♛hat government intervention can help stabilize the economy. The Keynesian multiplier demonstrates that the economy flourishes as🌞 the government increases spending and the net gain is greater than the dollar amount spent. Critics argue that the multiplier ignores how governments finance spending by taxation or debt issues.