Unit 3 February 24

• The spending multiplier effect
• An initial change in spending ( C, Ig, Xn ) causes a larger change in aggregate spending or aggregate demand
• Multiplier = Change in AD/ Change in spending 
• Multiplier = Change in AD/ Change in C, Ig or Xn
• Why does this happen 
• Expenditure and income flow continously which sets off a spending increase in the economy 
• Calculating the spending multiplier 
• The spending multiplier can be calculated from the MPC or MPS
• Multiplier = 1/1-MPC or 1/MPS
• Multipliers are ( + ) when there is an increase in spending and ( - ) when there is an decrease 
• When government taxes, and the multiplier works in reverse 
• because now is leaving the circular flow 
• Tax multiplier ( its negative )
• -MPC/1-MPC or -MPC/MPS
• if there is a tax cut, then the multiplier is +, because there is now more money in the circular flow