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What is the difference between the consumption multiplier and the money multiplier in terms of how...

What is the difference between the consumption multiplier and the money multiplier in terms of how each influences aggregate demand?

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Answer #1

Consumption multiplier is our MPC, which is between 0 and 1. It shows the fraction of income which the consumer is consuming form every dollar earned. It will bring changes to the IS curve.

On the other hand money multiplier is the change in the Reserve requirements which changes the money multiplier. It is given as K(money multiplier) = 1/RR. It brings change in your LM curve.

Chanegs in both the values will affect the AD curve. But, changes in money multiplier will affect it more because the extent of money multipier is large.

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