An Explanation of The Marginal Propensities
|Marginal Propensity to Consume (MPC)
|Marginal Propensity to Save (MPS)
|Marginal Propensity to Tax (MPT)
|Marginal Propensity to Import (MPM)
The proportion of additional income that is spent
|The proportion of additional income that is saved
|The proportion of additional income that is paid in tax
|The proportion of additional income that is spent on imports
An economy has the marginal propensity to save of 0.15, marginal propensity to tax of 0.20 and a marginal propensity to import of 0.15.
a) Calculate the size of the multiplier.
b) If the Government increases their infrastructure spending by £60m, calculate the total increase in GDP, assuming all other things remain equal.
Step 1: Insert the values into the withdrawal formula
Step 2: Multiply the injection by the multiplier
Impact on GDP = Injection x multiplier
= £60m x 2
The final bullet point above mentions time lags. This is an excellent point to include in any evaluation on the effectiveness of the multiplier. It may take up to 18 months for the full multiplier effect to be seen & any change to consumer confidence during this period will impact the final outcome.