How this calculator works
New spending becomes income for someone else, who then spends part of it, creating further income. With a marginal propensity to consume of 0.8, each dollar of new spending generates 80 cents of extra spending, then 64 cents, and so on. The geometric series sums to a multiplier of 1 / (1 - 0.8) = 5, so an initial $100 change supports $500 of total GDP. This is the simple closed-economy multiplier. It assumes spare capacity, a fixed price level, no crowding out from higher interest rates and no import leakage, so real-world multipliers are usually smaller.
Formula
Spending multiplier = 1 / (1 - MPC) = 1 / MPS. The change in GDP = multiplier × initial change in spending. Rearranged, MPC = 1 - 1 / multiplier. With a proportional income tax rate t, the simple formula becomes 1 / (1 - MPC × (1 - t)).
Worked example
An MPC of 0.8 gives a multiplier of 5. An initial spending increase of $100 therefore raises GDP by $500, taking GDP from $2,000 to $2,500. At an MPC of 0.75, the multiplier is 4 and the same $100 adds $400.
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Frequently asked questions
Why is the multiplier larger when MPC is higher?
A higher MPC means households re-spend a larger share of each round of new income, so the chain of spending takes longer to fade and the total is larger. As MPC approaches one, the multiplier grows without bound in the simple model.
Does government spending have the same multiplier?
Not always. Government purchases enter GDP directly and may have a multiplier near 1/(1-MPC), while transfer payments and tax cuts are first filtered through household spending behaviour. Estimates vary by country and economic conditions.
Why is the real multiplier often smaller?
Imports, taxes, higher interest rates and rising prices all absorb part of the extra demand. At full employment, extra spending mainly raises prices rather than output.