Question

Explain the basic idea of the expenditure multiplier and the role consumers' play.

Answer 1

An expenditure multiplier is also known a the Keynesian multiplier. This measures the change in the income of an economy due to the change in the autonomous spending of the consumer. A multiplier is calculated as the ratio of change in income and the change in the autonomous consumption of the consumer. The higher the autonomous consumption, higher will be the multiplier and the change in the income of the economy. The idea behind that is that with the rise in the autonomous expenditure by the consumers, their spending becomes someone else’s income who further spend them on and make it someone else’s income and the process keep going on to finally bring the change in the total income by a multiplier amount.

The size of the multiplier depends on the consumer’s marginal propensity to consume or save, as multiplier= 1/1-MPC= 1/MPS. So it is important to note that as the spending increases, so is the multiplier. Thus it is primarily the consumers who are determining the final change in the income in the economy.

However, government spending can also affect the value of the multiplier.