Question

Why are expenditure multipliers smaller in reality than our basic model predicts?

Answer 1

The expenditure multiplier depends on the marginal propensity to consume. Thus the higher the mpc the greater will be the multiplier. In reality however there will be several leakages from the spending flow that will mean that the multiplier will not be as large as expected. There could be unexpected increases in savings that reduce the multiplier. There can also be effects such as the crowding out effect that curbs part of the increase in the output due to the rise in the expenditure. These all make the multiplier smaller than expected.