Question

Calculate the expenditure multiplier and explain the process by which it works.

Answer 1

Expenditure in the market is calculated as 1 / 1- MPC. It is the amount that result in total increase in the output if there is an increase in the expenditure in the market. For example, if the consumption in the market is increased by 100, and the next person getting it in the market will spend some amount of it, that depend on the marginal propensity to consume in the market, lets assume that expenditure on the next level is 80, then that 80 will be again spend by the receiver and he migh save some amount of it and spend other. this will lead to a much higher increase in the overall GDP than the intial 100 spend.

this is multiplier effect.