what is the multiplier effect 
the multiplier effect refers to the proportional amount of increase or decrease in final income that results from an injection or withdrawal of capital the multiplier effect measures the impact that a change in economic activity like investment or spending will have on total economic output this degree of amplification is known as the multiplier investopedia mira norianunderstanding the multiplier effectgenerally economists are most interested in how infusions of capital positively affect income or growth many economists believe that capital investments of any kind whether it be at the governmental or corporate level will have a broad snowball effect on various aspects of economic activity as its name suggests the multiplier effect provides a numerical value or estimate of a magnified expected increase in income per dollar of investment in general the multiplier used in gauging the multiplier effect is calculated as follows multiplier change in income change in spending begin aligned text multiplier frac text change in income text change in spending end aligned multiplier change in spendingchange in income the multiplier effect can be seen in several different types of scenarios and is used by a variety of different analysts when estimating expectations for new capital investments example of the multiplier effectassume a company makes a 100 000 capital investment to expand its manufacturing facilities in order to produce more and sell more after a year of production with the new facilities operating at maximum capacity the company s income increases by 200 000 this means that the multiplier effect was 2 200 000 100 000 simply put every 1 of investment produced an extra 2 of income the keynesian multipliermany economists believe that new investments can go far beyond just the effects of a single company s income depending on the type of investment it may have widespread effects on the economy at large a key tenet of keynesian economic theory is that of the multiplier the notion that economic activity can be easily influenced by investments causing more income for companies more income for workers more supply and ultimately greater aggregate demand essentially the keynesian multiplier is a theory that states the economy will flourish the more the government spends and the net effect is greater than the exact dollar amount spent different types of economic multipliers can be used to help measure the exact impact that changes in investment have on the economy for example when looking at a national economy overall the multiplier would be the change in real gdp divided by the change in investments government spending changes in income brought about by changes in disposable income through tax policy or changes in investment spending resulting from monetary policy via changes in interest rates some economists also like to factor in estimates for savings and consumption this involves a slightly different type of multiplier when looking at savings and consumption economists might measure how much of the added income consumers are saving versus spending if consumers save 20 of new income and spend 80 of new income then their marginal propensity to consume mpc is 0 8 using an mpc multiplier the equation would be mpc multiplier 1 1 mpc 1 1 0 8 5 where mpc marginal propensity to consume begin aligned text mpc multiplier frac 1 1 text mpc frac 1 1 0 8 5 textbf where text mpc text marginal propensity to consume end aligned mpc multiplier 1 mpc1 1 0 81 5where mpc marginal propensity to consume therefore in this example every new production dollar creates an extra spending of 5 money supply multiplier effecteconomists and bankers often look at a multiplier effect from the perspective of banking and a nation s money supply this multiplier is called the money supply multiplier or just the money multiplier the money multiplier involves the reserve requirement set by the federal reserve and it varies based on the total amount of liabilities held by a particular depository institution in general there are multiple levels of money supply across the entire u s economy the most familiar ones are 1