00:01
The multiplier effect has to do with the marginal propensity to consume or mpc, and the formula for the multiplier is equal to 1 divided by 1 minus the mpc, or that marginal propensity to consume.
00:16
And essentially what the multiplier effect is, is that we'll have some sort of a change in income, whatever that might be, and that change in income is going to result in an even larger change in output.
00:28
Because we take that change in income and we multiply it by that multiplier.
00:35
And that's going to give us that much larger change in output.
00:42
So for a quick example, suppose somebody has $1 ,000, and they have an mpc, which is equal to 80%, or otherwise 0 .8.
00:53
Now with that $1 ,000, they're going to spend 80 % of it, which means they're going to spend $800.
01:00
Now that $800, whoever that wound up with, they also have that marginal propensity to consume of 80%.
01:06
So they're going to spend 80 % of the $800 they just got.
01:10
They're going to spend $640.
01:13
Now the person that got $640 is going to do the same thing...