Keynesian Multiplier Calculator

Formula first

Overview

The Keynesian Multiplier illustrates how an initial change in autonomous spending leads to a proportionately larger increase in total national income. It quantifies the cumulative effect of recirculated currency as income spent by one individual becomes the earnings of another.

Symbols

Variables

k = Multiplier, MPC = Marginal Propensity to Consume

Apply it well

When To Use

When to use: This equation is applied in macroeconomic modeling to predict the total economic output resulting from changes in government spending or investment. It assumes that the economy is not at full employment and that prices remain relatively stable.

Why it matters: It provides a mathematical basis for fiscal stimulus policies, showing how targeted spending can mitigate recessionary gaps. By understanding the multiplier, economists can gauge the efficiency of different tax or spending measures on Gross Domestic Product growth.

Avoid these traps

Common Mistakes

• Subtracting income instead of using the MPC decimal.

One free problem

Practice Problem

In a hypothetical economy, consumers spend 80% of every additional dollar of income they receive. Calculate the Keynesian multiplier for this economy.

Solve for: $k$

Hint: Divide 1 by the difference between 1 and the marginal propensity to consume.

The full worked solution stays in the interactive walkthrough.

Keep going

Related Formulas

References

Sources

1. Mankiw, N. Gregory. Macroeconomics.
2. Wikipedia: Keynesian multiplier
3. Britannica: Multiplier (economics)
4. Mankiw, N. Gregory. Principles of Economics. 9th ed., Cengage Learning, 2021.
5. Samuelson, Paul A., and William D. Nordhaus. Economics. 19th ed., McGraw-Hill Education, 2010.
6. Wikipedia: Marginal propensity to consume
7. Mankiw, N. Gregory. Principles of Economics.
8. A-Level Economics — Keynesian Model