Question

Explain the difference between the Expenditure/Spending Multiplier and the Money Multiplier. Include the equation used to determine the multiplier for each.

Answer 1

Expenditure multiplier is the government fiscal policy tool which indicates that the real GDP in the economy can be increased by multiple times the increase in the autonomous spending that can be in the form of increase in government spending, investment spending, exports etc. money multiplier on the other side is a monetary policy tool used to to calculate the change in money supply when there is a change in the monetary base

Spending multiplier is given by 1/1-mpc where MPC is the marginal propensity to consume. Money multiplier is given by (1+c)/(r +c). Here, c is the currency deposit ratio and r is the reserve ratio.