What Is the Multiplier Effect? Formula and Example

What Is the Multiplier Effect? The multiplier effect is an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of capital. In effect, Multipliers effects measure the impact that a change in economic activity—like investment or spending—will have on the total economic output of something. This amplified effect is known as the multiplier . Key Takeaways The multiplier effect is the proportional amount of increase or decrease in final income that results from an injection or withdrawal of spending. The most basic multiplier used in gauging the multiplier effect is calculated as the change in income divided by the change in spending and is used by companies to assess investment efficiency. The money supply multiplier, or just the money multiplier, looks at a multiplier effect from the perspective of banking and money supply. The money multiplier is a key concept in modern fractional reserve banking. Other multipliers include the deposit multiplier, fiscal multiplier, equity multiplier, and earnings multiplier. Investopedia / Mira Norian Understanding the Multiplier Effect Generally, economists are most interested in how infusions of capital positively affect income or growth. Many economists believe that capital investments of any kind—whether it be at the governmental or corporate level—will have a broad snowball effect on various aspects of economic activity. As its name suggests, the multiplier effect provides a numerical value or estimate of a magnified expected increase in income per dollar of investment. In general, the multiplier used in gauging the multiplier effect is calculated as follows: begin{aligned}text{Multiplier}=frac{text{Change in Income}}{text{Change in Spending}}end{aligned}Multiplier=Change in SpendingChange in Income​​ The multiplier effect can be seen in several different types of scenarios and used by a variety of different analysts when analyzing and estimating expectations for new capital investments. Example of […]

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