Keynesian Multiplier

The Keynesian multiplier (K) is a concept from macroeconomics that measures the impact of an increase in income on consumption and thus on national income. The multiplier effect occurs when an initial increase in spending leads to an increase in income and thus generates further additional spending, leading to a greater economic growth than the initial spending boost.

In the equation, MPC stands for the marginal propensity to consume, which is the fraction of additional income that a household is likely to consume rather than save. The Keynesian multiplier is therefore calculated as K = 1 / (1 - MPC), where K represents the multiplier.

This formula becomes particularly useful in times of economic recession, where fiscal policy might be used to stimulate spending and economic activity. By understanding the effect of the multiplier, governments and policymakers can predict how changes in fiscal policy might influence the overall economy.