It is important to remember Y (national income) = AE (aggregate expenditure) when calculating the spending multiplier to determine government spending in order to return the economy to potential gdp/full employment.
How is the spending multiplier calculated?
- The expenditure multiplier calculates the effect of a change in autonomous spending on total spending and aggregate demand in the economy. Divide the final change in real GDP by the change in autonomous spending to calculate the expenditure multiplier.
- If consumers spend more and save less, the multiplier rises, resulting in a stronger stimulus effect. As a result, the spending multiplier is inextricably linked to the economic concept of the multiplier effect. A small change in the government's activities will have a significant impact on the overall economy.
- The spending multiplier is defined as the ratio of GDP change (Y) to autonomous expenditure change (AE). The multiplier is greater than one because the change in GDP is greater than the change in AE.
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