Multiplier Theory

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Multiplier Theory

Shifts in aggregate spending bring about changes in the equilibrium level of national income. An upward shift in aggregate spending or aggregate expenditure (AE) increase GDP while a downward shift in AE lowers equilibrium level of GDP. Thus, we observe that GDP equilibrium moves in the same direction as the changes in AE. The multiplier shows the magnitude of these changes in GDP level due to given changes in aggregate expenditure.

The multiplier provides a measure of the magnitude of changes in GDP2.

Definition and the concept of Multiplier

The multiplier shows the extent or the magnitude of changes in national income (GDP) consequent to a given increase in autonomous aggregate spending.

The multiplier is the ratio of the changes in GDP to a change in spending, that is, the change in GDP divided by the change in autonomous spending that brought it about.

Thus, if multiplier is denoted by the symbol K, then


where ΔY is the change in national income and ΔA is change in the aggregate spending.


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