This multiplier is commonly used to illustrate the basic multiplier principle, highlighting how and why a change in an autonomous expenditure, especially investment expenditures, triggers the multiplier process through induced consumption.

This simple expenditures multiplier can be derived from the simplest Keynesian model, the private sector, or two-sector Keynesian model. However, it works just as well for any model as long as consumption is the only induced component.

The Simple Formula

The formula for this simple expenditures multiplier, m, is:

m

=

1 (1 - MPC)

=

1 MPS

If, for example, the MPC is 0.75 (and the MPS is 0.25), then an autonomous $1 trillion change in investment expenditures results in a change in aggregate production of $4 trillion.

While the simple expenditures multiplier can be derived from the basic two-sector Keynesian multiplier, it also works for models with more sectors, as long as consumption is the only induced expenditure. If, for example, autonomous government purchases change by $1 trillion, then the change in aggregate production is $4 trillion, the same as with a $1 trillion change in investment expenditures. Moreover, the same change in aggregate production is realized if autonomous exports or consumption expenditures change by $1 trillion.

Other Multipliers

• (Complex) Expenditures Multiplier: The expenditures multiplier, or complex expenditures multiplier, is so named because it includes other induced expenditures and components. At the very least it might include induced investment expenditures. However, the "complete" four-sector complex multiplier is likely to include induced government purchases, induced taxes, and induced exports, as well.


• Simple Tax Multiplier: The simple tax multiplier measures changes in aggregate production caused by changes in taxes when consumption is the only induced expenditure. It differs from the simple expenditures multiplier in that aggregate expenditures change by less than the change in taxes.


• (Complex) Tax Multiplier: The tax multiplier, or complex tax multiplier, is so named because it also includes other induced expenditures and components, including induced investment expenditures, induced government purchases, induced taxes, and induced exports.


• Balanced-Budget Multiplier: The balanced-budget multiplier measures the combined impact on aggregate production of equal changes in government purchases and taxes. The simple balanced-budget multiplier has a value equal to one.