Spending Multiplier
Definition
The spending multiplier measures how much total spending increases for each dollar increase in autonomous expenditure (such as investment or government purchases). It shows the cumulative effect on aggregate demand throughout multiple rounds of spending.
Analogy
Imagine you throw a pebble into a pond, and the ripples spread out in concentric circles. The spending multiplier works similarly, as each round of spending creates new rounds of income and consumption, causing the initial impact to multiply throughout the economy.
Related terms
Multiplier Effect: The process by which an initial change in spending leads to further changes in aggregate demand through successive rounds of spending.
Autonomous Expenditure: Spending that does not depend on income levels, such as investment or government purchases.
Aggregate Demand: The total amount of goods and services demanded in an economy at a given price level and time period.
"Spending Multiplier" appears in:
Study guides (2)
Practice Questions (6)
Which of the following is true about the spending multiplier?
Which of the following represents the relationship between the MPC and the size of the spending multiplier?
Which of the following best represents the formula for calculating the spending multiplier?
Which of the following accurately describes the relationship between government spending and the size of the spending multiplier?
Which of the following accurately describes the relationship between the marginal propensity to consume (MPC) and the size of the spending multiplier?
Which of the following accurately describes the relationship between the marginal propensity to save (MPS) and the size of the spending multiplier?
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