Chapter 24

Expenditure Multipliers:
The Keynesian Model
Fixed Prices and Planned Expenditure
• The Keynesian modal that we study in this
chapter describes the economy in the very
short run
• It isolates and places in focus the forces that
operate at a business cycle peak, when
expansion end and a recession begins, and at
a trough, when recession turns into an
expansion
• In the very short run prices are fixed
• Firms hold the prices they have fixed, and the
quantities they sell depend on demand, not
supply
• Fixed prices have two immediate implications
for the economy as a whole:
1. Because each firm’s price is fixed, the price
level is fixed
2. Because demand determines the quantities
that each firm sells, aggregate demand
determines the aggregate quantity of goods
and services sold, which equals real GDP
• So to understand the fluctuations in real GDP when
the price level is fixed, we must understand
aggregate demand fluctuations.

• The Keynesian aggregate expenditure model

explains fluctuations in aggregate demand by
identifying the forces that determine expenditure
plans

• I.o.w The Keynesian model explains fluctuations in

AD at fixed price level by identifying the forces that
determine planned expenditure
Planned Expenditure
• Aggregate expenditure has four components:
1. Consumption expenditure
2. Investment
3. Governments expenditure on goods and
services
4. Net exports (exports minus imports)
• These four components of aggregate
expenditure sum to real GDP
• Aggregate planned expenditure is equal to
planned consumption expenditure plus planned
investment plus planned governments
expenditure on goods and services plus planned
exports minus planned imports
• Planned investment, government expenditure, and
exports don’t depend on the current level of real
GDP
• Planned expenditure does depend on real GDP
because it depends on income
• Because some consumer goods are imported,
planned imports depend on GDP
A two-way link between aggregate expenditure
and GDP
• Because real GDP influences consumption
expenditure and imports, and because
consumption expenditure and imports are
components of aggregate expenditure, there is a
two-way link between aggregate expenditure
and GDP. (ceteris paribus)
 an increase in real GDP increases aggregate
expenditure, and
 An increase in aggregate expenditure increases
real GDP
• You are going to learn how this two-way link
between aggregate expenditure and real GDP
determines real GDP when the price level is
fixed
• The starting point is to consider the first piece
of the two-way link: the influence of real GDP
on planned consumption expenditure and
savings
Consumption function and Savings function
• Several factors influence consumption
expenditure and savings
• The important ones are:

 Disposable income
 Real interest rates
 Wealth
 Expected future income
• Disposable income is aggregate income minus
taxes plus transfer payments
YD = Y – TX + TR
• Aggregate income equals real GDP so
disposable income depends on real GDP
• We focus on the relationship between
consumption expenditure and disposable
income when the other three factors listed are
constant
Consumption and planned savings
• The table shows an example of the
relationship among planned consumption
expenditure, planned savings and disposable
income
Disposable Planned Planned
income consumption savings
expenditure
(billions of 2000 rand)
A 0 1.5 -1.5
B 2 3.0 -1.0
C 4 4.5 -0.5
D 6 6.0 0
E 8 7.5 0.5
F 10 9.0 1.0
• It list the consumption function expenditure
and the savings that people plan to undertake
at each level of disposable income
• Notice that at each level of disposable income,
consumption expenditure plus savings always
equals disposable income
• Households can only consume or save their
disposable income, so planned consumption
expenditure plus savings always equals
disposable income
• The relation ship between consumption
expenditure and disposable income, ceteris
paribus, is called consumption function
• The relationship between savings and
disposable income, ceteris paribus, is called
the savings function
Consumption function
• Y-axis measures consumption expenditure
• X-axis measures disposable income
• Along the consumption function, as disposable income
increases, consumption expenditure also increases
• At point A on the consumption function, consumption
expenditure is R2 billion even though disposable income
is zero
• This consumption spending is called autonomous
spending
• It is the amount of consumption expenditure that would
take place in the short run even people had no current
income, for survival
• Consumption expenditure in excess of this amount is
called induced consumption, which is induced by an
increase in disposable income
 Continue
 Autonomous consumption do not vary with
income (need for survival)
 Induced consumption is the portion of
consumption that varies with disposable
income
 When there is a change in disposable income
it “induces” a change in consumption
45⁰ line
• The height of this line measures disposable income
• At each point on this line, consumption expenditure
equals disposable income
• In the range over which the consumption function
lies above the 45⁰ line, consumption expenditure
exceeds disposable income
• Below consumption is less than disposable income
• At the intersect between the two lines consumption
expenditure equals disposable income
Savings function

2 dissaving savings Saving function

0
Savings

2 4 6 8 10
-2
Disposable income

• Along the saving function, as income increases,

saving also increases
• At disposable income less that R6 billion saving is
negative
• Negative saving is called dissaving
• Disposable income ˃ R6 billion saving is positive
• At R6 billion saving is zero
• Notice the connection between the two parts
of the figure
• When consumption expenditure exceeds
disposable income in part (a), savings is
negative in part(b)
• And vice versa
• When saving is negative past savings are used
to pay for current consumption
• Such a situation cannot last forever, but it can
occur if disposable income falls temporarily
Marginal propensity to consume and save
• The extent to which consumption expenditure
changes when disposable income changes
depends on the marginal propensity to consume
• The marginal propensity to consume (MPC) is
the fraction of a change in disposable income
that is consumed
• It is calculated as the change in the consumption
expenditure () divided by the change in
disposable income () that brought it about.
 Example

• When disposable income increases from R6

billion to R8 billion, consumption expenditure
increase from R6 billion to R7.5 billion
• The R2 billion increase in disposable income
increases consumption expenditure by R1.5
billion

= 0.75
• The marginal propensity to save (MPS) is the
fraction of a change in disposable income that
is saved
• It is calculated as the change is saving()
divided by the change in disposable income()
that brought it about

• An increase in disposable income from R6

billion to R8 billion increases saving form zero
to R0.5 billion
 MPC + MPS = 1
• Part of each rand increase in disposable income is
consumed and the remaining part is saved
• You can see that these to marginal propensities
sum to 1 using the equation

• Divide both sides of the equation by the change in

disposable income to obtain

• is the marginal propensity to consume (MPC),

and is the marginal propensity to save (MPS), so
MPC + MPS = 1
Slopes and marginal propensities
• The slope of the consumption function is the MPC,
and the slope of the savings function is the MPS
• The MPC is the slope of the consumption function
• The MPs is the slope of the saving function
Savings function

• The increase in disposable income is the base of

the triangle
• The increase in consumption spending is the
height of the triangle
• The slope of the consumption function is given by
the formula “slope equals rise over run”
Other influences on consumption expenditure and
saving
• A change in disposable income changes the
consumptions expenditure function and saving
function
• Along the functions, all other influences(real
interest rate, wealth and expected future income)
on consumption expenditure and saving are fixed
• A change in any of these other influences shifts
both the consumption function and the saving
function
• When the real interest rate falls or when wealth or
expected future income increases, consumption
expenditure increases and savings decreases
• The consumption function shifts from CF₀ to CF₁

CF₁
10 45⁰ line
CF₀
Consumption expenditure

2 4 6 8 10
Disposable income
• The savings function shifts from SF₀ to SF₁

2
SF₀
SF₁
0
Savings

2 4 6 8 10
-2
Disposable income

• Such shifts commonly occur during the expansion phase

of the business cycle because expected future income
increases
• When the real interest rate increases or when wealth or
expected future income decreases, consumption
expenditure decreases and savings increases
• Such shifts occur when a recession begins because
expected future income decreases
• The consumption function shifts over time as
other influences on consumption expenditure
change
• These other influences include the real
interest rate and wealth and depending on
how they change, the consumption functions
shifts up or down
• Rising expected future income brings a steady
upward shift in the CF
• As the CF shifts upward, autonomous
consumption increases
Consumption as a function of real GDP
• Disposable income changes when either real GDP
changes or net taxes change
• If tax rates don’t change, real GDP is the only
influence on disposable income
• So consumption expenditure depends not only on
disposable income but also on real GDP
• We use this link between consumption expenditure
and real GDP to determine equilibrium expenditure
• But first we need to look at one further component
of aggregate expenditure: imports
Import Function
• The greater SA’s GDP, the larger is the quantity of
SA’s imports
• The relationship between imports and real GDP is
determined by the marginal propensity to import
• The marginal propensity to import is the fraction
of an increase in real GDP that is spent on imports
• It is calculate as the change in imports divided by
the change in real GDP that brought it about,
ceteris paribus.
• Worldwide the MPI has been increasing as the
global economy has become more integrated
• Real GDP influences consumption expenditure
and imports
• But consumption expenditure and imports
along with investment, government
expenditure and exports influence real GDP
Real GDP with a fixed price level
• How does aggregate expenditure planned
interact to determine real GDP when the price
level is fixed?
1. You will study the relationship between
aggregate planned expenditure and real GDP
2. You learn about the key distinction between
planned expenditure and actual expenditure
3. You will study equilibrium expenditure, a
situation in which aggregate planned
expenditure and actual expenditure are equal
• The relationship between aggregate planned
expenditure and real GDP can be described
by:
 Aggregate expenditure schedule – lists
aggregate planned expenditure generated at
each level of real GDP
 Aggregated expenditure curve – is a graph of
the aggregate expenditure schedule
 Planned expenditure
Real C I G X M AE
GDP (Y) (Aggrega
te
planned
expendit
ure)
A 0 0 2 2.5 2 0 6.5
B 5 3.5 2 2.5 2 1 9
C 11 7.7 2 2.5 2 2.2 12
D 12 8.4 2 2.5 2 2.4 12.5
E 13 9.1 2 2.5 2 2.6 13
F 14 9.8 2 2.5 2 2.8 13.5
. Aggregate Planned Expenditure:
The AE Curve
Aggregate planned expenditure and Real GDP
• The table sets out an aggregate expenditure schedule
together with the components of aggregate planned
expenditure
• To calculate aggregate planned expenditure at a
given real GDP, we add the various components
together
• The fist column of the table shows real GDP,
• The second column show the consumption
expenditure generated by each level of real GDP
• A R1 billion increase in real GDP generates a R0.7
billion increase in consumption expenditure
• MPC = 0.7
• The next two columns show:
 Investment – which depends on real interest
rate and expected rate of profit (R2 billion)
 Government expenditure on goods and
services (R2.5 billion)
• The next two columns show
 Exports – influenced by events in the rest of
the world, foreign-produced goods and
services relative to the price of similar SA-
produced goods and services and exchange
rate – they are not directly affected by SA real
GDP (R2 billion constant)
 Imports – increase as SA’s real GDP increases.
A R1 billion increase in SA’s real GDP generates
and R0.2 billion increase in imports. MPI is 0.2
• The last column shows aggregate planned
expenditure – AE = C + I + G + X – M
• The figure plots a aggregate expenditure curve
Real GDP = x-axis
Aggregate expenditure = y-axis
• The aggregate expenditure curve is the dark
pink line AE
• Points A to F on that curve corresponds to the
rows in the table
• The AE curve is a graph of aggregate planned
expenditure(last column) plotted against real
GDP (first column)
• The figure also shows the components of
aggregate expenditure
• The constant components – (I + G + X) are
shown by the horizontal lines in the figure
• C is the vertical gap between the lines labelled
I + G + X and I + G + X + C
• To construct the AE curve, we must subtract
imports(M) from the I + G + X + C line
• Aggregate expenditure is expenditure on SA-
produced goods and services (C+I+G+(X-M))
• Because imports are only a small part of aggregate
expenditure, when we subtract imports from the
other components of aggregate expenditure,
aggregate planned expenditure still increases as real
GDP increases
• Consumption expenditure (varies with GDP) minus
imports is called induced expenditure
• the sum of I ,G and X which does not vary with real
GDP is called autonomous expenditure
• Consumption expenditure and imports can also have
an autonomous component – does not vary with GDP
• Autonomous expenditure is expenditure if GDP were
zero
• In the figure autonomous expenditure is R6.5
billion – aggregate planned expenditure when
GDP is zero
• For each R1 billion increase in real GDP,
induced expenditure increases by R0.5 billion
• The aggregate expenditure curve summarises
the relationship between aggregate planned
expenditure and real GDP
Actual expenditure, planned expenditure and
real GDP
• Actual aggregate expenditure is always equal
to real GDP
• Aggregate planned expenditure is not
necessarily = to actual aggregate expenditure
and is therefore not necessarily = to real GDP
• People carry out their planned consumption
expenditure, the government implements its
planned expenditure on goods and services, and
net exports are as planned
• Firms carry out their plans to purchase new
buildings, plant and equipment
• But one component of investment is the change in
firms’ inventories of goods
• If aggregate planned expenditure is less than real
GDP, firms don’t sell all the goods they planned to
sell and they end up with unplanned inventories
• And vice versa
Equilibrium Expenditure
• Equilibrium expenditure is the level of aggregate
expenditure that occurs when aggregate planned
expenditure equals real GDP
• Equilibrium expenditure is a level of aggregate
expenditure and real GDP at which everyone’s
spending plans are fulfilled.
• When the price level is fixed, equilibrium
expenditure determines real GDP
• When aggregate planned expenditure and actual
aggregate expenditure are unequal, a process of
convergence toward equilibrium expenditure occurs
• Through this convergence process, real GDP adjusts
 Continue
REAL GDP (Y) AGGRIGATE UNPLANNED
PLANNED INVENTORY
EXPENDITURE (AE) CHANGE
A 10 11.5 -1.5
B 11 12 -1
C 12 12.5 -0.5
D 13 13 0
E 14 13.5 0.5
F 15 14 1
• The table sets out aggregate planned
expenditure at various levels of real GDP
• These values are plotted as points A to F along
the AE curve
• The 45⁰ line show all the points at which
aggregate planned expenditure equals real
GDP
• Where the AE curve lies above the 45⁰ line,
aggregate planned expenditure exceeds real
GDP and vice versa
• Where the AE curve intersects the 45⁰ line,
aggregate planned expenditure equals real
GDP.
• Point D illustrates equilibrium expenditure
• At this point GDP is R13 billion
Convergence to equilibrium
• What are the forces that move aggregate
expenditure toward its equilibrium level?
• First we must look at a situation in which
aggregate expenditure is away from its
equilibrium level
• Suppose real GDP is R 11 billion
• With real GDP at R 11 billion, actual aggregate
expenditure is also at R11 billion
• But aggregate planned expenditure exceeds
actual expenditure
• When people spend R12 billion and firms produce
goods and services worth R11billion, firms
inventories fall by R1billion, and point B
• Because the change in inventories is part of
investment, actual investment is R1 billion less that
planned investment
• Real GDP doesn’t remain at R11 billion for very
long
• Firms have inventory targets based on their sales
• When the inventories fall below target, firms
increase production to restore inventories to the
target level
• To increase inventories, firms hire additional
labour and increase production
• Suppose that they increase production in the next
period by R1 billion
• Real GDP increases by R1 billion to R12 billion
• But again, aggregate planned expenditure exceeds
real GDP
• When real GDP is R12 billion, aggregate planned
expenditure is R12.5 billion, inventories decrease
by R0.5 billion , point C
• Again, firms hire additional labour and production
increases; real GDP increases yet further
• The process that we’ve just described –
planned expenditure exceeds real GDP,
inventories decrease, and production
increases to restore inventories – ends when
real GDP has reached R13 billion in the
example
• At this real GDP, there is equilibrium
• Unplanned inventory changes are zero
• Firms do not change their production
• Vice versa
The Multiplier
• Investment and exports can change for many
reasons
 A fall in the real interest rate,
 A wave of innovation, such as occurred with
the spread of computers in the 1990’s
 An economic boom in Western Europe and
Japan.
• These are all examples of increases in
autonomous expenditure
• When autonomous expenditure increases,
aggregate expenditure increases and so does
equilibrium expenditure and real GDP
• But the increase in real GDP is larger than the
change in autonomous expenditure
• The multiplier is the amount by which a change in
autonomous expenditure is magnified or multiplied
to determine the change in equilibrium expenditure
and real GDP
• To get the basic idea of the multiplier, we’ll work
with an example economy in which there are no
income tax and no imports (simple economy)
The basic idea of the multiplier
• Suppose that investment increases
• The additional expenditure by businesses means
that aggregate expenditure and real GDP increases
• the increase in real GDP increases disposable
income, and with no income tax, real GDP and
disposable income increase by the same amount
• The increase in disposable income brings increase
in consumption expenditure
• Real GDP and disposable income increase further,
and so does consumption expenditure
• The initial increase in investment brings an
even bigger increase in aggregate expenditure
because it induces an increase in consumption
expenditure
• The magnitude of the increase in aggregate
expenditure that results form an increase in
autonomous expenditure is determined by the
multiplier
 Continue
Real Gdp(y) Original planned aggregate New planned aggregate
expenditure expenditure

12 A 12.25 A’ 12.75
13 B 13 B’ 13.50
14 C 13.75 C’ 14.25
15 D 14.50 D’ 15
16 E 15.25 E’ 15.75
• Initially, when real GDP is R12 billion, aggregate
planned expenditure is R12.25 billion
• For each R1billion increase in real GDP,
aggregate planned expenditure increases by
R0.75 billion
• The aggregate expenditure schedule is shown
in the figure as the aggregate expenditure curve
AE₀
• Initially, equilibrium expenditure is R13 billion
• You can see this equilibrium in row B of the
table and in the figure where the curve AE₀
intersects the 45⁰ line an the point marked B
• Now suppose that autonomous expenditure increases by
R0.5 billion
• What happens to equilibrium expenditure?
• Look at the figure
• When this increase in autonomous is added to the
original aggregate planned expenditure, aggregate
planned expenditure increases by R0.5 billion at each
level of real GDP
• The new aggregate expenditure curve is AE₁
• The new equilibrium expenditure occurs where the AE₁
intersects the 45⁰ line and is R15 billion
• At this real GDP, aggregate planned expenditure equals
real GDP
The multiplier effect
• The increase in autonomous expenditure of R0.5
billion increases equilibrium expenditure by R2
billion
• =2
• That is, the change in autonomous expenditure
leads to an amplified change in equilibrium
expenditure
• This amplified change is the multiplier effect –
equilibrium expenditure increase by more than the
increase in autonomous expenditure
• The multiplier is greater than 1
• Initially, when autonomous expenditure increases,
aggregate planned expenditure exceeds real GDP
• Thus inventories decreases
• Firms respond by increasing production so as to
restore their inventories to the target level
• As production increases, so does real GDP
• With a higher level of real GDP, induced expenditure
increases
• Thus the equilibrium expenditure increases by the
sum of the initial increase in autonomous
expenditure and the increase in induced expenditure
Why is the multiplier greater than 1?
• We’ve seen that equilibrium expenditure
increase by more than the increase in
autonomous expenditure
• This make the multiplier greater than 1
• The multiplier is greater than 1 because
induced expenditure inducer further increases
in expenditure
• Additional income induces additional
expenditure, which creates additional income
The size of the multiplier
• Suppose that the economy is in a recession
• Profit prospects start to look better, and firms are
making plans for large increases in investment
• The world economy is also heading toward
expansion, and exports are increasing.
• How strong will the expansion be?
• This is a hard question to answer
• But an important ingredient in the answer is
working out the size of the multiplier
• The multiplier is the amount by which a change
in autonomous expenditure is multiplied to
determine the change in equilibrium
expenditure that it generates
• To calculate the multiplier, we divide the change
in equilibrium expenditure by the change in
autonomous expenditure
The multiplier and the slope of the AE curve
• The magnitude of the multiplier depends on
the slope of the AE curve
• The steeper the slope of the AE curve ,the
larger is the multiplier

Or
Imports and income taxes
• The multiplier is determined, in general, not
only by the MPC but also by the marginal
propensity to import and by the income tax
rate
• Imports make the multiplier smaller than it
otherwise would be
• Income taxes also make the multiplier smaller
than it would otherwise be
• The marginal propensity to import and the
income tax rate together with the marginal
propensity to consume determine the multiplier
• Their combined influence determines the slope of
the AE curve
• Over time, the value of the multiplier changes as
tax rates change and as the marginal propensity
to consume and the marginal propensity to
import change
• These ongoing changes make the multiplier hard
to predict
Business cycle turning points
• At business cycle turning points, the economy
moves form expansion to recession or from
recession to expansion
• Economists know quite a lot about the forces and
mechanism that bring business cycle turning
points but they can’t predict them
• The forces that bring business cycle turning points
are the swings in autonomous expenditure such
as investment and exports
• The mechanism that give momentum to the
economy’s new direction is the multiplier
Recap
 The Multiplier
• The amount by which a change in autonomous expenditure is magnified or
multiplied to determine the change in equilibrium expenditure and real GDP
The Multiplier Effect
• The change in autonomous expenditure leads to
an amplified change in equilibrium expenditure
• Equilibrium expenditure increases by more than
the increase in autonomous expenditure
• The increase in autonomous expenditure
of R0.5 billion increases equilibrium expenditure
by R2 billion = = 2
Why is the Multiplier Greater Than 1?
• Because induced expenditure increases – an
increase in autonomous expenditure induces
further increases in expenditure
The Size of the Multiplier
• To calculate the multiplier, we divide the change in equilibrium expenditure
by the change in autonomous expenditure

Economics 2ed: Global and Southern African

Perspectives © 2013 74
 The Multiplier
The Multiplier and the Slope of the AE Curve
• The magnitude of the multiplier depends on the slope of the AE curve
Imports and Income Taxes
• Make the multiplier smaller than it
Otherwise would be
• Imports – the increase in investment
increases real GDP, which in turn
increases consumption expenditure
– but part of the increase in
expenditure is on imported goods
and services.
• Only expenditure on South African-produced goods and services increases
South Africa’s real GDP. The larger the marginal propensity to import, the
smaller is the change in South Africa’s real GDP

Economics 2ed: Global and Southern African

Perspectives © 2013 75
 The Multiplier
• Income taxes – The increase in investment increases real GDP. Income tax
payments increase so disposable income increases by less than the
increase in real GDP and consumption expenditure increases by less than it
would if taxes had not changed. The larger the income tax rate, the smaller
is the change in real GDP
• The Multiplier Process

Economics 2ed: Global and Southern African

Perspectives © 2013 76
Mathematical note: The algebra of the
Keynesian model
We begin by defining the symbols we need:
AE – aggregate planned expenditure
Y – real GDP
C – consumption expenditure
I – investment
G – Government expenditure
X – Exports
M - Imports
T – Taxes
a – Autonomous consumption spending
Tₐ - Autonomous taxes
b – Marginal propensity to consume
m – Marginal propensity to import
t – marginal tax rate
A – autonomous expenditure
Aggregate expenditure
AE = C + I + G + X – M
Consumption function – C depends on
disposable income (YD)
C = a + bYD
YD = real GDP minus net taxes (Y – T)
So if we replace YD with (Y-T) the consumption
functions is:
C = a + b(Y-T)
• Net taxes (T) equal autonomous taxes
(independent of income) Tₐ, plus induced
taxes(vary with income), tY. So:
T = Tₐ + tY
Use this last equation to replace T in the
consumption function. So the consumption
function is:
C = a - bTₐ + b(1-t)Y
Import function Imports depend on real GDP and
the import function is:
M = mY

Aggregate expenditure curve. Use the

consumption function and the import function to
replace C and M in the AE equation. That is:
AE = a - bTₐ + b(1-t)Y + I + G + X –mY
Collect the terms on the right side of the
equation that involve Y
AE = (a - bTₐ + I + G + X) + [b(1 – t) - m]Y
Autonomous expenditure (A) is (a - bTₐ + I + G + X),
and the slope of the AE curve is [b(1 – t) - m]
So the equation for the AE curve is:
AE = A + [b(1 – t) - m]Y
Aggregate planned expenditure

15 AE
Autonomous
expenditure equals
a - bTₐ + I + G + X

10
Slope equals
b(1 – t) - m

5 10 15
Real GDP
Equilibrium expenditure
Equilibrium expenditure occurs when aggregate
planned expenditure(AE) equals real GDP(Y)
That is:
45⁰
Aggregate planned expenditure

15 AE
Equilibrium
expenditure

10

A
5

5 10 15
Real GDP
• The scale on the x-axis and y-axis is identical, so
the 45⁰ line shows the points at which
aggregate planned expenditure equal real GDP
• The figure shows the point of equilibrium at the
intersection of the AE curve and the 45⁰ line
• To calculate equilibrium expenditure, solve the
equation for the AE curve an the 45⁰ line for the
two unknown quantities AE and Y starting with
AE = A + [b(1 – t) - m]Y
AE = Y
Replace AE with Y in the AE equation to obtain

Y = A + [b(1 – t) - m]Y

The solution for Y is

A
The multiplier
The multiplier equals the change in equilibrium
expenditure and real GDP (Y) that results from a
change in autonomous expenditure(AE)divided by
the change in autonomous expenditure(A)

changes equilibrium expenditure and real GDP by:

A

Multiplier =
The size of the multiplier depends on the slope
of the AE curve, b(1 – t) – m.
The larger the slope, the larger is the multiplier.
So the multiplier is larger:
• The greater the marginal propensity to
consume(b)
• The smaller the marginal tax rate(t)
• The smaller the marginal propensity to
import(m)
• An economy with no imports and no tax has
m=0 and t=0
• In this special case, the multiplier equals

If b is 0.75, then the multiplier is 4

• In an economy with imports and income taxes,
if b=0.75, t=0.2 and m=0.1, the multiplier
equals

=2