Assuming there is no government or foreign sector, the formula for the multiplier is:

Question

Quizplus · Accepted Answer

In the absence of a government or foreign sector, the only leakage from the economic system is saving. Therefore, the formula for the multiplier is 1/(1 - MPC), where MPC is the marginal propensity to consume. This is because the initial injection of spending will result in an increase in income, which will in turn lead to an increase in consumption. This increase in consumption will lead to a further increase in income, and so on, creating a multiplier effect. The value of the multiplier is inversely proportional to the MPC; the higher the MPC, the lower the multiplier, and vice versa.

Assuming There Is No Government or Foreign Sector, the Formula