5 Steps to a 5 AP Macroeconomics 2019

Consumption, Saving, Investment, and the Multiplier ❮ 105

Multiplier effect: Describes how a change in any component of aggregate expenditures
creates a larger change in GDP.

Spending multiplier: The magnitude of the spending multiplier effect is calculated as
Multiplier = (DGDP)/(D spending) = 1/MPS = 1/(1 – MPC).

Tax multiplier: The magnitude of the effect that a change in taxes has on real GDP.
Tm = (DGDP)/(D taxes) = MPC × Multiplier = MPC/MPS.

Balanced-budget multiplier: When a change in government spending is offset by a change
in lump-sum taxes, real GDP changes by the amount of the change in G; the balanced-
budget multiplier is thus equal to 1.