The simple multiplier model is a key concept in Keynesian economics that illustrates how an initial change in economic activity can lead to a larger overall change in national income. This model focuses on the relationship between autonomous spending and the resulting increase in national output, assuming that all other factors remain constant.

At its core, the simple multiplier demonstrates how an increase in government spending, investment, or consumption can have a multiplied effect on the economy. The magnitude of this effect is determined by the marginal propensity to consume (MPC) and the marginal propensity to save (MPS).

Important Note: The multiplier effect relies heavily on the assumption that not all income is saved. A higher MPC results in a larger multiplier because more of the income is spent, thus increasing aggregate demand.

  • Autonomous Spending: Initial change in spending (e.g., government investment).
  • Multiplier: The factor by which the initial change is multiplied.
  • MPC: Marginal Propensity to Consume – the fraction of additional income that is spent on consumption.
  • MPS: Marginal Propensity to Save – the fraction of additional income that is saved.

The formula for calculating the simple multiplier is:

Multiplier (k) Formula
k 1 / (1 - MPC)

The multiplier's value is inversely related to the MPS; as the MPS increases, the multiplier decreases.