Keynesian Multiplier

Definition:

The effect on demand of any exogenous increase in spending, such as an increase in government outlays is a multiple of that increase—until potential is reached. If economy is in equilibrium the change in GNP = the initial change in GNP * Multiplier. Multiplier = 1/1-mpc
If the government spends, the people who receive this money then spend most on consumption goods and save the rest. At each step, the increase in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of an equilibrium.

Example:

Simply stated, if the government increased expend. by 1Billion and this resulted in a GNP of 5 Billion then the multiplier is 5.

References:

http://en.wikipedia.org/wiki/Keynesian_economics
Walsh & Leddin, Chp. 3 pp.53-59
Godley & Lavoie Chp. 3 p.70

Reporter: Eoin O Shaughnessy
Group Members: Dave Hickey, Maciej Woznica, Eoin O’Shaughnessy, Noreen O’Hanlon, Paul O’Brien, Thomas Harty, Jackie Brosnan.