Sample Essay

When the spending and expenditure increases by £200 million and the national income increases  by £600 million, the multiplier can be determined by dividing the change in the national income with the spending. This provides a resultant multiplier value to be 3. (£600m/£200m=2)

If the government spending increases by £20 million to fund the Olympics and the value of the market multiplier is at 3, then the national income would increase to £60 million. (£20m X 3 = £60m)

The multiplier value is dependent on the value of Y. The consumption with assumed Y=1 is 12.4, and the consumption with assumed Y=5 is 14.0. Therefore it can be deduced that the multiplier is 1.6. (14.0 – 12.4 = 1.6)

When the marginal propensity to consume is 0.6, the multiplier with an assumed range of Y values from 1 to 5 stands at 2.4 ((0.6 X 5) – (0.6 X 1) = 2.4)

Where the marginal propensity to save is at 0.1, the multiplier would be at 0.4 assuming the value of Y to be from 1 to 5.

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Essay: Examples of Multiplier Effect
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