The factor 5 in this equation is called “the multiplier.” The $1,000 is the increase in government spending and is called the “initial spending.” The $5,000 is the increase in total spending in the economy.

If the MPC is 80% for everyone in this economy, then the total amount of additional spending in the entire economy is: $1,000 (the initial government spending) + $800 (on the used car) + $640 (on the television) + … = $5,000. This person spends her/his MPC of the $640 on goods, and so forth. This creates income for the person who sold the television. If this person’s MPC is also 80%, then spending (for instance, on a television) increases by 80% of $800 or $640. This additional spending of $800 turns into additional income for the person who sold the product (the used car). The Multiplier and the Significance of the Multiplier If the government increases spending by $1,000, and if the recipients of the $1,000 decide to spend $800 to purchase goods (let’s say, a used car), then the marginal propensity to consume is 800/1,000, or. The MPC indicates how much of any additional earnings a person consumes. Keynes discussed the Marginal Propensity to Consume ( MPC). According to Keynes, if we can find ways to stimulate consumption and other forms of spending, we will solve the problem. The Keynesian model is based on the belief that demand drives the economy and that a shortfall in demand causes recessions and depressions.

Mps in economics