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How to Calculate Multipliers With MPC

The marginal propensity to consume (MPC) is an indicator of what a household would do with extra income. For example, a MPC of .80 indicates that 80 percent of the extra income would be used on additional consumption. The MPC is calculated by dividing the change in consumption by the change in income. MPC is an important indicator as it is used when calculating the size of the multiplier effect. The multiplier effect is a feature of Keynesian economic models which determines the real output caused by government spending.

Instructions

- 1
  Calculate the MPC if the MPC figure is not provided. Calculate the MPC by dividing the change in household consumption by the change in household income. Record the figure obtained in decimal form.
- 2
  Plug the MPC into the output multiplier formula. The multiplier formula is 1 divided by (1-MPC). For example, if the MPC is .8 subtract .8 from 1. Next, divide .2 by 1 to obtain the multiplier. Repeat the process for all of the different MPC figures.
- 3
  Multiply the spending increase by the multiplier. For instance, an increase of spending of $200 with a multiplier of 5 will lead to a total increase in spending effect of $1,000.

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