Simple Multiplier

Notes compiled from videos by Alex Symonds

What is the simple multiplier?

Simple multiplier: a factor used to determine how one change in available income
will impact the national income once it has cycled through the flow of income.

● The simple multiplier is used to determine the initial change in aggregate demand
(AD) (e.g., a boost in investment or government funding) impacts on national
income (once it has cycled through the flow of income).
● The formulae used to determine the simple multiplier are:

1 1
𝑘= 1−𝑀𝑃𝐶
or 𝑘 = 𝑀𝑃𝑆

Where MPC denotes the marginal propensity to consume, and MPS denotes the
marginal propensity to save.
● The change in aggregate demand is multiplied by the simple multiplier, indicates
the new level of national income
● The change in income (Y) is given by ∆𝑌 = 𝑘∆𝐴𝐷

What does this all mean?

● An increase in aggregate demand will increase how much money individuals
have. Individuals can do one of two things with this income:
1. Save the income
2. Spend the income
● Therefore, we are interested in two things:
1. The marginal propensity to save (MPS) - the proportion of extra income
earnt that is saved
2. The marginal propensity to consume (MPC) - the proportion of extra
income earnt that is spent

© Art of Smart Education, 2022 https://www.artofsmart.com.au/ 1

Example Question
If the government wanted to increase national income by $25 million, how much would it
have to boost government spending?
The government knows that, in the economy:
● Savings (S) = 50
● Government (G) = 30
● Net exports (X) = 0
● Consumption (C) = 40
● Investment (I) = 15
● MPC = 0.8

Using the formula ∆𝑌 = 𝑘∆𝐴𝐷, we know from the question that ∆𝑌 = 25 and ∆𝐴𝐷 = ∆G.
1
𝑘= 𝑀𝑃𝑆
And, 𝑀𝑃𝑆 + 𝑀𝐶𝑃 = 1.
As MPC = 0.8, MPS must be 0.2.
1
𝑘= 0.2
𝑘=5

Now, going back to the formula for change in income,

∆𝑌 = 𝑘∆𝐴𝐷
25 = 5∆𝐺

We can then solve for G and see that G = 5. Therefore, the government would have to
boost spending by 5 million dollars.

© Art of Smart Education, 2022 https://www.artofsmart.com.au/ 2

Looking for some extra help with studying HSC
Economics?
We have an incredible team of HSC Economics tutors and mentors!

We can help you master the HSC Economics syllabus and ace your upcoming HSC
Economics assessments with personalised lessons conducted one-on-one in your
home, online or at one of our state of the art campuses in Hornsby or the Hills!

We’ve supported over 8,000 students over the last 11 years, and on average our
students score mark improvements of over 20%!

To find out more and get started with an inspirational HSC Economics tutor and mentor,
get in touch today or give us a ring on 1300 267 888!

© Art of Smart Education, 2022 https://www.artofsmart.com.au/ 3