Skip to main content
  • Washington University in St. Louis

Search form

Home

Muddy Water Macro

Economics perspectives from the confluence of the Mississippi & Missouri

Main Menu

  • Users' Guide
  • Keynesian Basics
  • Fiscal Policy
  • Monetary Policy
  • Inflation & Unemployment
  • Great Recession
  • Commentary
  • About Us

You are here

Home / Multiplier

Multiplier

The multiplier is a numeric measure of how a change in spending affects the economy.  Think of the multiplier like a snowball effect: when an individual or the government spends it creates income for another individual.  If this individual spends a portion of her new earnings, she creates income for a third individual, who then creates income for a fourth individual...and so on.  Therefore, spending $1 may create several dollars worth of new income in the economy.  The multiplier says exactly how much income is generated by an extra $1 in spending.  For example, if the multiplier is 1.5,  $1 in spending leads to a $1.50 increase in income.    

The magnitude of the multiplier depends on the share of new income that people spend, a concept called marginal propensity to consume (MPC).  Intuitively, a higher MPC leads to a larger multiplier.      

Estimates of the U.S. multiplier vary widely, but a middle-of-the-road estimate is about 1.5.  In a recent paper, Professor Fazzzari and his co-authors James Morley and Irina Panovska find estimate a multipler in the range of 1.6 to 2.0 when the economy has slack resources .  They find a multiplier less than 1.0, however, when the economy is closer to full employment.  This finding is consistent with the implications of basic Keynesian macroeconomics:  additional spending should be more stimulative when the economy has unemployment.

  • About Us
  • Contact Us
  • Definitions
  • Site Map
  • Users' Guide

Muddy Water Macro | Washington University in St. Louis | One Brookings Drive, St. Louis, MO 63130-4899