Macroeconomic Objectives and Theory (Unit 4 Topic 1)
Keynesian Multiplier simulator
How to use the interactive model
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use the sliders to set levels of leakages - MPS, Tax rate, MPM
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then adjust slider to view the effects on GDP of an increase in Government Expenditure (injection)
Why is this stuff important to know?
At a high school level, you generally learn the simple multiplier formula that only takes into account MPS.
The calculator here also considers effect of tax rates on multiplier outcomes, as well as the effects of imports. So it gives you a more rounded view of outcomes.
The outcomes are fairly intuitive - like it's probably not an ideal outcome for additional government expenditure to go completely towards purchase imported goods as it represents a leakage in circular flow, so it will have a limited multiplier effect. This calculator now gives you some mathematical rationale.
Keynesian Cross
How to use the interactive model
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use the slider to adjust the MPC of the economy
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use slider to change level of Government Expenditure
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Observe the proportionately larger increase in GDP compared to original expenditure.
Why is this stuff important to know?
This model represents a simple multiplier relationship of income and MPC. However it's important to remember that MPC isn't just income minus savings. MPC is the income available for consumption once all leakages (S + T + M) have been taken into account and removed from income. And then 'marginal' which means 'additional' - what is the proportion of additional expenditure when we get an extra dollar?
The multiplier effect is visible as the increase in additional GDP - when governments put in $1 then we will see a greater than $1 increase in GDP.
Disclaimer: This is one of those economic models that I think some teachers teach and others don't seem to get too hung up on it (at a high school level). I've included it for completeness. If you can articulate the idea that each extra dollar of government expenditure has a proportionally larger effect on GDP, then you are probably okay. I think that my calculator above is probably a more useful tool to develop your understanding of multiplier effect.