Finding the Multiplier from the Aggregate Expenditure Graph

Question

Finding the Multiplier from the Aggregate Expenditure Graph

Answer 1

You can compute it in two simple steps!

First you want to find the MPC (Marginal Propensity to Consume) by taking

MPC = (Change in Aggregate Expenditure / Change in Real GDP), which tells you how much spending increases for every dollar increase in income

Once you have the MPC then you can take

Multiplier = 1 / (1 - MPC) in order to find the end value.

So say that MPC = 0.75, that would mean that

Multiplier = 1 / (1 - 0.75) = 1 / 0.25 = 4, meaning that any initial change in spending in the economy will lead to a final change in Real GDP that is four times larger

Answer 2