Hello.
Any given multiplier depends upon its reciprocal, called the "marginal
propensity to save." For example, for a multiplier of 10, there is an
underlying marginal propensity to save of the reciprocal of 10, or
1/10 (or 0.10).
The multiplier depends on "marginal propensity to save" because, when
people receive income, they can either save it or spend it. Suppose
that for every dollar that people receive in income, they save 10
cents and spend 90 cents. This means that there's a marginal
propensity to consume of 0.90 and a marginal propensity to save of
0.10. If $1.00 is spent, the first person to receive it would save
$0.10 and spend $0.90. The second person would receive the $0.90, save
$0.09, and spend $0.81 (0.90 x 0.90). The third person would receive
0.81, save 0.081, and spend 0.729 (0.81 x 0.90)... and so on and so
on. The total spending would be: $1.00 + $0.90 + $0.81 + $0.729 +
$0.6561 + etc. etc..... = $10.00. Hence, a marginal propensity to
save of 0.10 causes there to be a multiplier of 10.
Sources:
"Classroom Techniques, Macroeconomic Equilibrium,"
"...people can do two things with income: save it or consume it. In
general they will consume only a fraction of their income and save the
remaining fraction. Thus, individuals have a marginal propensity to
consume (MPC) and a marginal propensity to save (MPS), respectively.
If MPC is 0.9, a person receiving a $1 will save $0.10. Someone else
will obtain $0.90 and will save $0.09, and so forth. Adding $1 + $.90
+ $.81 + . . . = $10. Since the multiplier is 10 (= 1/MPS), income
will increase to $10."
Source: "Classroom Techniques, Macroeconomic Equilibrium," hosted by
University of North Carolina:
http://www.unc.edu/~rbyrns/Principles_of_Economics/Great_Ideas2003/Part%2007-%20Foundations%20of%20Macroeconomic%20Theory/GI2003-26.htm
"The multiplier is equal to the reciprocal of the marginal propensity
to save: The greater is the marginal propensity to save, the smaller
is the multiplier. Also, the greater is the marginal propensity to
consume, the larger is the multiplier."
Source: McGraw-Hill Macroeconomics, Chapter 8,
http://highered.mcgraw-hill.com/sites/0070886695/student_view0/chapter8/chapter_highlights.html
"Because of the relationship between consumption and saving, there is
a kind of mirror image of the marginal propensity to consume — the
"marginal propensity to save" (MPS)...
...The value of the multiplier is equivalent to the change in real GDP
divided by the change in desired spending which induces it.
Mathematically the multiplier is the reciprocal of the marginal
propensity to save or, what is by definition the same thing, one minus
the marginal propensity to consume. Thus, if the marginal propensity
to save is 1/4, the multiplier would have a value of 4, meaning that a
1 million dollar increase in desired spending (from whatever source)
would raise the level of real GDP by 4 times that amount."
Source: University of Toronto, Eco100, Topic 14: THE KEYNESIAN
REVOLUTION
http://www.chass.utoronto.ca/~reak/eco100/100_14.htm
search strategy: multiplier, principle, "marginal propensity to save,"
recripocal
I hope this helps. |
Clarification of Answer by
juggler-ga
on
23 Mar 2003 07:03 PST
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|
