The Multiplier Effect
Follow £1m of spending as it ripples through round after round of the economy, and watch it sum to the multiplier 1/(1−MPC). Where the number comes from, made visual.
When a government spends £2bn on a new railway, the effect on the economy is worth far morethan £2bn. The extra income doesn’t stop with the builders — it ripples outward, round after round. That ripple is the multiplier effect.
One person’s spending is another’s income
Every pound spent in an economy lands in someone else’s pocket as income. The builders paid to lay the railway spend some of their wages in shops; the shopkeepers spend some of that on suppliers; the suppliers spend some again. A single injection of spending sets off a whole chain of further spending.
Each round is smaller than the one before, because people save, pay tax and buy imports rather than spending every penny at home. But even though the rounds shrink, they all add up — so the total rise in national income is larger than the original injection.
Drop a pebble in a pond: the splash is the injection, but the ripples spreading out carry the effect far wider.
See it: the rounds pile up
Imagine £1m of new spending where people spend 80p of every extra pound they receive. That first £1m becomes income; 80% of it (£0.8m) is spent again, then 80% of that, and so on — a shrinking geometric series.
Step through it below and watch the rounds sum to a single, larger total.
Text description ↓Hide text description ↑
A step-through of the multiplier. An initial £1m of spending becomes income; a fraction (the marginal propensity to consume, here 0.8) is spent again, and again, forming the geometric series 1 + 0.8 + 0.8² + … which sums to 1 / (1 − 0.8) = 5.
The multiplier formula
The size of the multiplier depends on how much of each extra pound is passed on. The marginal propensity to consume (MPC) is the fraction of extra income that gets spent; the marginal propensity to withdraw (MPW) is the fraction that leaks out into savings, taxation and imports. Because every extra pound is either spent or withdrawn, MPC + MPW = 1.
multiplier, k = 1 / (1 − MPC) = 1 / MPW
The smaller the leakages, the closer MPC is to 1, and the bigger the multiplier: more of each pound stays in circulation to fuel the next round.
A worked calculation
A government spends an extra £2bn on infrastructure, in an economy where the marginal propensity to consume is MPC = 0.75. What is the eventual rise in national income?
First find the multiplier: k = 1 / (1 − MPC) = 1 / (1 − 0.75) = 1 / 0.25 = 4.
Then multiply the injection by it: total rise = £2bn × 4 = £8bn. The £2bn of government spending eventually generates four times as much income as the money churns round the economy.
Common mistakes
Practice
In an economy the marginal propensity to consume is MPC = 0.6. What is the value of the multiplier?
Show the answer ↓Hide the answer ↑
k = 1 / (1 − MPC) = 1 / (1 − 0.6) = 1 / 0.4 = 2.5. Each £1 of new spending eventually raises national income by £2.50.
Where next?
The multiplier is the engine behind aggregate demand: it explains why a shift in investment or government spending moves the whole AD curve by more than the initial change.
Frequently asked questions
What is the multiplier effect?+
What is the marginal propensity to consume?+
How do you calculate the multiplier?+
Why does the multiplier come from a geometric series?+
The ScholarsGate Economics Team
Oxbridge & Russell Group economics tutors
Written and reviewed by ScholarsGate tutors who teach A-Level and undergraduate economics. Every explainer is checked against the AQA, Edexcel, OCR and Eduqas specifications.
Keep exploring
Want a tutor to walk you through it?
Book a DBS-checked A-Level Economics tutor for a 1-on-1 lesson — online or in person.
Find a A-Level Economics tutor