AP Macroeconomics · Unit 3 National Income & Price Determination
Learning Objectives
Spending Multiplier: 1/(1-MPC) = 1/MPS. A $1 increase in government spending creates more than $1 in GDP growth via the "ripple effect."
Tax Multiplier: -MPC/(1-MPC). Smaller than spending multiplier because part of a tax cut is saved, not spent. Always negative (tax cut → GDP increase).
MPC: Marginal Propensity to Consume — the fraction of each additional dollar that is spent. MPC + MPS = 1 always.
Balanced Budget Multiplier: Equal increase in G and T → multiplier = 1. GDP rises by exactly the amount of the spending increase.
Tags
FiscalMultiplierMPCTax
Fiscal Parameters
MPC = 0.80
ΔG (Gov Spending) = $100B
ΔT (Tax Cut) = $0B
MULTIPLIER ANALYSIS
Spending Mult:5.0×
Tax Mult:-4.0×
ΔGDP from G:$500B
ΔGDP from T:$0
Total ΔGDP:$500B
Why Spending > Tax Cuts: $100B in government spending → all $100B enters the economy immediately. A $100B tax cut → consumers save $20B (if MPC=0.8) and only spend $80B. So the spending multiplier is always 1 larger than the (absolute) tax multiplier.