Question

Why is it important to consider the marginal propensity to withdraw when assessing the multiplier effect?

Answer 1

Marginal propensity to withdraw is the money which gets withdrawn or leaked out from the system as deposits increase or income increases

This portion of money gets withdrawn or leaked out in the form of savings and thus ends up reducing the multiplier effect.

Since money exits the circular flow of income model, the rate of formation of new money gets reduced, leading to multiplier effect, which ends up reducing money supply in the entire economy.

This is why MPW is important to understand the multiplier effect.