AP MacroeconomicsAggregate Demand & Supply
Multiplier Effect
The multiplier effect is the magnified change in total output and income that results from an initial change in spending.
When spending rises, it becomes income for others, who then spend a fraction of it, and the cycle repeats. The size depends on the marginal propensity to consume. It applies to changes in investment, government spending, and net exports.
Formula / Example
Multiplier = 1 ÷ (1 − MPC) = 1 ÷ MPS.
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