Without Wings said:
* The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold on reserves. In other words, it is money used to create more money and calculated by dividing total bank deposits by the reserve requirement.
* The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold on reserves. In other words, it is money used to create more money and calculated by dividing total bank deposits by the reserve requirement.
* The expansion of the money supply that results from a Federal Reserve System member bank's ability to lend significantly in excess of its reserves.
* In economics, a multiplier effect – or, more completely, the spending/income multiplier effect – occurs when a change in spending causes a disproportionate change in aggregate demand. It is particularly associated with Keynesian economics; some other schools of economic thought reject or downplay the importance of multiplier effects, particularly in the long run.
Those first three defn's refer to the money multiplier process which is totally different to the keynesian multiplier in the HSC economics course. The fourth one is the only one that any HSC student need look at.
Essentially the keynesian multiplier is a mathematical model to demonstrate that when income (any factor in Y=C+I+G+(X-M) ) rises by some exogenous amount, this extra income will result in an even greater rise as this income stimulates demand as it gets spent, and respent.
To consider this in a practical sense, say you are paid $100 to paint a fence. Say you then keep $50, and then pay someone to mow your lawn for $50. Then the person who mowed your lawn receives an extra $50 in income. The person who mowed the lawn might then spend $25 on a haircut and save $25. The hairdresser has an extra $25 in income and the process continues......
So even though there was only $100 extra income, this amount generated more economic activity as people passed it on through extra consumption.
Without going into the geometric progression which makes the formula true, the multiplier is essentially just 1/MPS. The MPS determines a "leakage" factor which as it increases the multiplier reduces, and if it reduces the multiplier gets larger (as if people save more less consumption is caused as a result of the extra income).
In a practical sense the keynesian multiplier holds no relevance. It works in a theoretical sense, but the problem with the multiplier is that it is impossible to measure an average MPS within an economy. Whilst we can work out an average propensity to consume (across an economy), we can't work out the marginal rate for each individual (i.e. marginal is for every extra dollar spent). So we cant just simply say that because our national savings ratio is such a figure that our MPS is equivalent. It wont be, because the savings ratio is an average, not marginal figure.
