hey econ students this is Jacob Clifford welcome to ACDC econ right now it's time to go over one of the most important Concepts in your macroeconomics class something called the multiplier of the multiplier of the multiplier of the multiplier is this ever going to end is this ever going to end seriously stop I'm actually making two videos on this topic in this video I'm going to talk about the math and equations and the stuff you need for your econ class but in this video I'm going to talk about John Mayor CHS and why the idea of the multiplier is important in an introductory macroeconomics course there's two different times you'll see the concept of the multiplier first when you learn about fiscal policy and learn about the spending multiplier and then again when you learn about monetary policy and learn about the money multiplier the situations are completely different but the math behind them and the equations themselves are practically identical let's start with the spending multiplier when the government spends money it becomes somebody's income and they save a portion of that and they spend the rest that spending becomes somebody else's income and they save some and spend some that keeps happening over and over again and that's called the multiplier effect an initial change in spending causes a ripple effect through the entire economy and leads to more total spending the size of that ripple effect depends on how much people spend or save when they get new income that's called the marginal propensity to consume in the marginal propensity to save for example let's say you find $100 in the ground and you spend $75 and save $25 your MPC is 75 and your MPS is 0.25 together they have to equal one because there's only two things you can do with new income spend it or save it which reminds me in exam questions we often assume that everyone in the economy has the same propensity to consume and Save which isn't really true in real life but that's okay the equation for the simple spending multiplier is one over the marginal propensity to save so if the MPC is 0.5 then the MPS is 0.5 then the spending multiplier is one over .5 which is just two so if the government increases spending by $2 billion that'll eventually become $4 billion of total spending did you get that the equation for the simple spending multiplier is one over the marginal propensity to save so if the MPC is .5 then the MPS is 0.5 then the spending multiplier is one over .5 which is just two so if the government increases spending by $2 billion that'll eventually become $4 billion of total spending now it's your turn let's say the MPC is 0.9 and the government looks to increase total spending by $20 billion two questions how much is the simple spending multiplier and how much initial government spending must be done to achieve the $20 billion of total spending hello hello are you on hello are you working are you working yes yes okay so if the MPC is 0.9 then the MPS must be 0.1 that means that the multiplier is 1 over .1 or 10 and if the goal is to spend a total of $20 billion then the government only needs to spend $2 billion that2 billion times the multiplier of 10 becomes $20 billion notice that in both of these examples the initial change in spending was $2 billion but one led to $4 billion of total spending and the other one had $20 billion of spending the reason for the difference was the amount that people consumed or spent of new money coming in the point is the higher the MPC the larger the multiplier effect before I move on to the money multiplier keep in mind there's also something called the tax multiplier it shows what happens when the government Cuts taxes and it's not as strong as the spending multiplier there's actually an equation for the tax multiplier but you don't really need it all you need to remember is the tax multiplier is one less than the spending multiplier so if the spending multiplier is 10 then the tax multiplier is only nine the reason is because there's one less ripple effect because consumers save a portion of their tax cut now if you want to practice again go ahead and click right here now you're also going to see the idea of the multiplier when you learn about fractional Reserve Banking and how Banks create money now instead of money being spent and saved it's money being deposited and loaned out when you deposit money in the bank it must hold a portion in required reserves and then loans the rest out the person who took out the loan spends that money and eventually that money gets way back into another bank that bank then holds a portion in reserves and Loans the rest out this keeps happening over and over and over again so sounds familiar right the portion of money that banks have to hold by law is called a reserve requirement so the money multiplier is one over that Reserve requirement so if banks have to hold 10% or 0.1 then the money multiplier must be 10 an initial increase in the money supply of $2 billion becomes a total increase of $20 billion in the economy okay now it's time to practice let's say the reserve requirement is .2 and the Federal Reserve buys bonds initially adding $2 billion to the economy two questions how much is the money multiplier and what will be the total increase in the money supply how do I look looking gain some weight little fat in the face okay it's one over2 so the money multiplier is five the $2 billion will eventually become $10 billion of Total Money created did you get that again click right here if you need to practice it's important to understand the general idea of the multiplier effect but if you're enrolled in a macroeconomics class it's important to be able to do these calculations and know the equations just remember that the simple spending multiplier and the money multiplier are one over how much you save all right thanks for watching until next time hey thanks for watching this video if you want to learn more about cans and the idea of the multiplier effect click right here and if you want to review for your final or for the AP test go to my website and learn more about my study guides click right here also please make sure to leave a comment below and like And subscribe sub subcribing tells me that you like my videos that you want me to make more okay until next time