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Concept
Multiplier (economics)
Summary
In macroeconomics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable.
For example, suppose variable x
changes by k units, which causes another variable y to change by M × k units. Then the multiplier is M.
Two multipliers are commonly discussed in introductory macroeconomics.
Commercial banks create money, especially under the fractional-reserve banking system used throughout the world. In this system, money is created whenever a bank gives out a new loan. This is because the loan, when drawn on and spent, mostly finishes up as a deposit back in the banking system and is counted as part of money supply. After putting aside a part of these deposits as mandated bank reserves, the balance is available for the making of further loans by the bank. This process continues multiple times, and is called the multiplier effect.
The multiplier may vary across countries, and will also vary depending on what measures of money are being considered. For example, consider M2 as a measure of the U.S. money supply, and M0 as a measure of the U.S. monetary base. If a 10, then the money multiplier is 10.
Fiscal multiplier
Transfer payments multiplier
Multipliers can be calculated to analyze the effects of fiscal policy, or other exogenous changes in spending, on aggregate output.
For example, if an increase in German government spending by €100, with no change in tax rates, causes German GDP to increase by €150, then the spending multiplier is 1.5. Other types of fiscal multipliers can also be calculated, like multipliers that describe the effects of changing taxes (such as lump-sum taxes or proportional taxes).
Multiplier-accelerator model
Keynesian economists often calculate multipliers that measure the effect on aggregate demand only. (To be precise, the usual Keynesian multiplier formulas measure how much the IS curve shifts left or right in response to an exogenous change in spending.
Official source
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