Now, the fact is that often GDP will go up by more than that initial injection.

By how much more?

Well, we need to know that so that we can get the amount right.

And the way we can find it out is using the multiplier.

The formula for the multiplier is 1 divided by 1 minus the MPC,

alright, which we've just defined or it could also be 1 divided by the MPS.

That marginal propensity to save is a percentage of

money that you saved when you got that $100, okay?

If you spent 90, you saved 10, all right?

So you can see these two will add up to one.

All right?

So, 0.9 and 0.1 add up to 1.

So, 1 divided by 1 minus the MPC, in the case we were just talking about,

where the MPC is 0.9, 1 divided by 0.1 gives us a multiplier of 10.

What does that tell us?

Well, it tells us that whatever income get shot into the economy, into the circular

flow, will magnify itself 10 times as we go around the economy.

Let me just show you how this works.

We've got an Excel sheet where these calculations

are, and you can see, why that initial

$100 will turn into 10 times the $100,

or 1,000, as it circulates around the economy.

Just have a look here.

You can see, here we've got the $100 going into

the economy, up, in, the left hand, upper left hand cell.

It's actually b2, alright, where the $100 goes in.

You can see, in the next column, the MPC, which is 0.9, okay?

So that means the $100 that I receive, I spend 90, alright,

and then you can see the MPS in the next column, it's 0.1.

0.9 plus 0.1 add up to 1, which is what has to happen.

That means I save $10, okay?

So, the total impact on GDP is 90.

Alright.

Now, that 90 goes into somebody else's pocket, and somebody

else says, oh good, I've got 90 in new income.

I'm going to spend 0.9 of 90, and I'm going to save 0.1 of 90.

So here we go to the second row, you see the person receiving in round two, $90.

They spend 81 of it and they save nine, so this lifts

again the spending in the economy by 81 and induces 81 in new output.

And that 81 goes into a new pocket or a new wallet.

That person then will take that 81 and they'll say good, I've got new income.

I'm going to spend 0.9 of it, just like everybody else does in this economy.

That means they spend 72.9, they save 8.1,

and again, output income are lifted by 72.9.

If we repeat this over and over, and you can see as you look at this Excel.

I carry it out actually to 60 rounds until the, the increase almost disappears.

If we repeat this over and over and we go down, we can see

how much GDP will go up as a result of that initial injection of $100.

And, if you add them all up, you see that it's about $1,000.

Now, the shortcut, rather than doing all these

rounds, is to say, $100 went into the economy.

My multiplier is ten, GDP will rise by 100 times 10, 1,000.

Okay?

Now, we can do the same calculation, you can see there is

another tab on this Excel where the MPC is smaller, it's 0.5.

So, this is a more saving economy, when the Korean uncle sends that $100, people

only spend 50, and they squirrel away 50 in their savings account, okay?

So, if that happens, we have an MPC of 0.5,

and MPS of 0.5, of course they add up to 1.

We take our multiplier formula, 1 divided by, 1 minus the MPC.

Or, 1 divided by the MPS in different.

And we're going to get actually, instead of ten that

we got last time, we're just going to get two.