ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The expenditure multiplier (spending multiplier) is a ratio that compares the total change in a nation’s GDP caused by an autonomous change in aggregate spending to the amount of that change in spending. It measures the impact of each dollar spent during an initial rise in spending on a nation’s total real GDP.

Detailed explanation-2: -In terms of gross domestic product, the multiplier effect causes gains in total output to be greater than the change in spending that caused it. The term multiplier is usually used in reference to the relationship between government spending and total national income.

Detailed explanation-3: -The expenditure multiplier shows what impact a change in autonomous spending will have on total spending and aggregate demand in the economy. To find the expenditure multiplier, divide the final change in real GDP by the change in autonomous spending.

Detailed explanation-4: -The multiplier effect indicates that an injection of new spending (exports, government spending or investment) can lead to a larger increase in final national income (GDP). This is because a proportion of the injection of new spending will itself be spent, creating income for other firms and individuals.

Detailed explanation-5: -To calculate the maximum change in GDP, use the spending multiplier. The formula for the spending multiplier is 1/MPS or 1/(1-MPC). In the example above, the multiplier would be 5 (1/. 2).