Income Expenditure Model: The Expenditure Multiplier

The Expenditure Multiplier
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The Expenditure Multiplier
The size of the expenditure multiplier matters in the real world because it ends up affecting the real GDP. The higher the multiplier, the high the increase in the real GDP. For example, consider an economy with an expenditure multiplier of 2. This implies that if the government injected $100 into the economy, the expenditure multiplier would cause an increase in real GDP of $200. Businesses, employees, and policymakers are at the focal of how the expenditure multiplier works. In the case of policymakers, they have to be aware of the size of the expenditure multiplier and its effects on the country's real GDP. This knowledge is especially important when policymakers are involved in deciding on the best economic measures to resolve a deficit in the economy of a country. The businesses, consumers, and employees also determine how the expenditure multiplier affects the real GDP. The aspect of autonomous spending makes these three elements matter in the size of the expenditure multiplier. Continuing with the government example provided above, let us assume that lawmakers decided to increase government spending by $100. This implies that the economy gets an additional $100 in circulation. There are only two things one can do with money, spend or save it. Businesses, employees, and consumers have what is referred to as the marginal propensity of consumption (MPC) which determines the amount of money consumed as opposed to savings. A higher expenditure multiplier implies high MPC...