Spending Multiplier Calculator

What is the Keynesian spending multiplier?

The spending multiplier estimates how much total economic output (GDP) changes when government spending increases by one dollar. In Keynesian economics, an initial injection of spending circulates through the economy as households consume a portion of each dollar received and save the rest, creating a chain of additional spending.

Pair this tool with the MPC calculator to explore marginal propensity to consume. To model how money supply changes affect the economy, try the money multiplier calculator. For broader macro context, use the GDP calculator.

Spending multiplier formula

Where $\text{MPC}$ is marginal propensity to consume and $\text{MPS}$ is marginal propensity to save. Total GDP impact equals the multiplier times initial government spending.

Worked example

If MPC is 0.8, then MPS equals 1 minus 0.8, or 0.2. The spending multiplier is 1 divided by 0.2, which equals 5. A $1,000 increase in government spending could raise GDP by $5,000 under these assumptions, before taxes, imports, and other leakages reduce the effect in real economies.

Practical limitations

• Real multipliers are smaller when taxes, savings, and imports leak spending out of the domestic circular flow.
• Timing matters. Multipliers are strongest when the economy has idle capacity.
• Fiscal policy effects depend on how spending is financed and whether households expect future tax increases.

Frequently asked questions