2.2 The Keynesian multiplier (HL)


  • The multiplier is a factor by which GDP changes following a change in an injection or leakage.

The formula for the multiplier:

  1. Multiplier = 1 / (1 – MPC)
  2. Multiplier = 1 / (MPS + MPT + MPM), where:
  • MPC – Marginal Propensity to Consume
  • MPS – Marginal Propensity to Save
  • MPT – Marginal Propensity to Tax
  • MPM – Marginal Propensity to Import

Essentially, both formulas are the same. Which one you will have to use depends on the information you have.

You have to know:

  • how to calculate the effect on GDP resulting from a change in any of the Injections (Investment, Government spending, Exports)
  • what kind of a change is required in a given injection to reach a certain level of GDP


Question: Current GDP is $100 bn, MPS = 0.1, MPT = 0.2, MPM = 0.2. Government’s GDP target is $150 bn. How much does government need to increase their spending by to reach the target? How will the budget be affected?


  1. What change of GDP we need to achieve: 150 – 100 = $50 bn
  2. Finding the multiplier: 1 / (0.1 + 0.2 + 0.2) = 2
  3. 50 / 2 = $25 bn is the value by which the government needs to increase their spending to reach the GDP target
  4. Find how much more will the governments earn in tax as a result of $50 bn increase in GDP: 50 * 0.2 = $10 bn (general formula: total change in GDP multiplied by the MPT)
  5. The government will spend $25 bn and there will be $10 bn increase in taxes collected. So effect on the budget: $10 – $25 = $-15 bn

Also, I remember while preparing for the IB Economics exam there was one question in one of the maths papers. It asked to show the multiplier effect on a diagram (2 marks).

multiplier effect

This is how the diagram for 2 marks had to look like. Exactly like that. The second shift in the AD (AD2 -> AD3) had to be bigger than the first one (AD1 -> AD2). Anything different to this (more AD curves, the two shifts being the same size, etc.) would score you 1 mark. However, always consult your teacher on matters like this as it is possible that the question is worded differently. That might change what is given in the markscheme/what the examiner is expecting.