• 10-2 (Key Question) What is the multiplier effect? What relationship does the MPC bear to the size of the multiplier? The MPS? What will the multiplier be when the MPS is 0, .4, .6, and 1? When the MPC is 1, .90, .67, .50, and 0? How much of a change in GDP will result if businesses increase their level of investment by $8 billion and the MPC in the economy is .80? If the MPC is .67? Explain the difference between the simple and the complex multiplier.

The multiplier effect is the magnified increase in equilibrium GDP that occurs when any component of aggregate expenditures changes. The greater the MPC (the smaller the MPS), the greater the multiplier. MPS = 0, multiplier = infinity; MPS = .4, multiplier = 2.5; MPS = .6, multiplier = 1.67; MPS = 1, multiplier = 1. MPC = 1; multiplier = infinity; MPC = .9, multiplier = 10; MPC = .67; multiplier = 3; MPC = .5, multiplier = 2; MPC = 0, multiplier = 1. MPC = .8: Change in GDP = $40 billion (= $8 billion [!]multiplier of 5); MPC = .67: Change in GDP = $24 billion ($8 billion [!]multiplier of 3). The simple multiplier takes account of only the leakage of saving. The complex multiplier also takes account of leakages of taxes and imports, making the complex multiplier less than the simple multiplier.