Multiplier (Keynesian)

Plain definition

The ratio showing how much total GDP changes in response to a one-dollar change in autonomous spending; the mechanism by which initial spending ripples through the economy.

In economics

The multiplier works because one person's spending is another's income: recipients spend part of each new dollar, creating further rounds. Its size depends on the marginal propensity to consume (higher MPC = larger multiplier) and on leakages like saving, taxes, and imports. The simple spending multiplier is 1/(1-MPC).

Example

The government spends $1 billion on road repairs with an MPC of 0.8. Workers spend$ 800 million of their wages, recipients of that spend $640 million, and so on. The total GDP increase approaches$ 5 billion, the initial $1 billion times the multiplier of 1/(1-0.8) = 5.

Common confusion

The multiplier is confused with the money multiplier. The Keynesian multiplier describes how spending ripples through incomes (fiscal process); the money multiplier (1/reserve ratio) describes how bank reserves expand into deposits (banking process). Same word, entirely different mechanisms.