Question

Briefly describe the multiplier process. Research to find the savings rate in the United States and use this to calculate the multiplier for the United States. Then, research to find estimates of the actual multiplier in the United States. Compare multiplier figures. Why might the theoretical multiplier be different than the actual multiplier?

Answer 1

The multiplier is given by the formula 1/(1-c) where c is the marginal propensity to consume. So if there is an increase in the marginal propensity to consume then the multiplier will be larger and the larger will be the effect on the economy. The savings rate in the US in 2017 was 2.4% for personal savings. If we take this to be an analog of the marginal propensity to save then the multiplier with this value wll be 41.67 as per the formula above. Thus a 1 unit increase in spending will have a 41 fold impact on the economy. The multiplier in the US is however much lower than that and will be around 10. This is because not all increases in consumption will have an impact on increasing the national income. So in reality the impact on the economy of a 1 unit increase in spending would be a lot less that 41.67. So actual multiplier is less than theoretical multiplier.