What weakens the multiplier effect of an increase in government expenditure income?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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What weakens the multiplier effect of government expenditures is when people save “too much” money.

The multiplier is biggest when people spend almost all of what they get from the government.  This is seen in the equation that gives us the multiplier.  It is

Multiplier = 1/1 – MPC

where the MPC is the marginal propensity to consume.  The marginal propensity to consume is how much people in general will spend of each dollar they get from the government spending.

If people spend 90 cents of every dollar they get, the MPC is .9.  In that case, the multiplier is 1/.1 or 10.  If, by contrast, people only spend 80 cents of every dollar they get from the government, the MPC is .8.  Then, the multiplier is 1/.2 or 5.  What this shows us is that a drop in the marginal propensity to consume will decrease the multiplier by a significant amount.

Thus, the thing that can weaken the multiplier effect is saving.  If the government increases spending but people save the money they get instead of spending it, the multiplier effect will not be as strong.

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