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 refers to the factor by which an increase in spending willl have an effect on the output of the economy. So in case the multiplier is 10 and consumption spending rises by 50, then as per the multiplier process the impact on total output is 10*50=500. As per the US bureau of economic analysis the current personal savings rate is 5.7%. This means that given the multiplier formula of 1/(1-c) where c is the marginal propensity to consume and given the savings rate of 5.7%, this is 94.3%. This the multiplier is 1/(0.057)= 17.54. As per the records the actual US multiplier will be in the range of 0.2-1.5. This is a large difference between the theoretical and the actual multiplier mainly due to leakages that occur at the time of spending in the form of savings and other sources. In real life income is not only dvided into consumption and savings. There are other components too.