AQA Specification focus:
‘Students will only be required to calculate the multiplier from the marginal propensity to consume.’
The multiplier effect is a central concept in AQA A-Level Economics, showing how an initial injection of spending leads to a greater final change in national income. These notes explain exactly what you need to know for exam purposes, focusing on multiplier calculations using the marginal propensity to consume (MPC).
Understanding the Multiplier in Context
The multiplier effect explains how the economy responds when there is an increase in expenditure. Rather than stopping at the initial injection, spending circulates multiple times within the economy, creating a multiplied impact. This chain reaction is crucial for evaluating the effectiveness of policies such as government spending, investment, or tax changes.
The Marginal Propensity to Consume (MPC)
The marginal propensity to consume is at the heart of multiplier calculations. It measures how much of any additional income households choose to spend rather than save.
Marginal Propensity to Consume (MPC): The proportion of additional income that households spend on consumption rather than save.
For example, if households receive £100 in extra income and spend £80 of it, the MPC is 0.8. This figure determines the size of the multiplier.
The Link Between MPC and the Multiplier
The multiplier depends directly on the MPC. A higher MPC means that more income is spent in each round, generating a larger multiplied effect on national income. Conversely, a lower MPC means more income is saved, reducing the overall multiplier.
Multiplier (k) = 1 ÷ (1 – MPC)
k = Multiplier (no units)
MPC = Marginal Propensity to Consume (decimal between 0 and 1)
This formula shows that the multiplier is inversely related to the marginal propensity to save (MPS), which is the fraction of income not spent.
The Role of the Marginal Propensity to Save (MPS)
Although the exam specification focuses on the MPC, it is useful to understand its relationship with the MPS.
Marginal Propensity to Save (MPS): The proportion of additional income that households choose to save rather than spend.
Since every unit of income is either consumed or saved:
MPC + MPS = 1
Therefore, the multiplier formula can also be written using MPS:
Multiplier (k) = 1 ÷ MPS
k = Multiplier (no units)
MPS = Marginal Propensity to Save (decimal between 0 and 1)
This shows the close connection between saving and the eventual size of the multiplier.
Key Points for Exams
When dealing with multiplier calculations in exams, keep the following points in mind:
Only MPC values are required: The AQA specification emphasises that calculations should use the MPC.
Round to sensible figures: Answers should normally be given to two decimal places unless otherwise instructed.
Interpret the result: Be prepared to explain what the size of the multiplier means for the economy. A large multiplier indicates stronger effects from injections.
Remember assumptions: The multiplier assumes constant prices, spare capacity, and no leakages other than savings. In real economies, other withdrawals (like taxes and imports) reduce its size.
Step-by-Step Multiplier Logic
To deepen understanding, here is how the multiplier process unfolds:
An initial injection occurs, such as government spending or investment.
This creates new income for households or firms.
A proportion of this income is spent according to the MPC.
The spending becomes income for others, who again spend a proportion based on the MPC.
This process continues, with each round becoming smaller, until the additional income added to the economy stabilises.
The formula simplifies these repeated rounds into a single calculation.
Why MPC Determines the Multiplier
The central reason why the MPC determines the size of the multiplier is that it dictates the pace and strength of repeated spending cycles:
High MPC (close to 1): Each round of spending is large, creating a strong multiplied effect.
Low MPC (close to 0): Most income is saved, so spending dies out quickly, and the multiplier is weak.
Understanding this link is essential for exam answers that require not just calculation but also evaluation.
Bullet-Point Exam Guidance
Learn the formula: Multiplier = 1 ÷ (1 – MPC).
Focus on MPC: Use only the MPC in AQA exams.
Interpret results: Always connect your numerical answer to real economic implications.
Highlight assumptions: Point out that taxes, imports, or inflation would reduce the multiplier in practice.
Show confidence: Even though calculations are straightforward, marks are often awarded for clear working and interpretation.
Common Exam Mistakes to Avoid
Forgetting that MPC must be between 0 and 1.
Using percentages instead of decimals in the formula.
Not linking the multiplier result to aggregate demand or overall income.
Overcomplicating the process with unnecessary detail beyond the MPC requirement.
By focusing on these clear requirements, students can answer multiplier calculation questions precisely as the AQA specification intends.
FAQ
AQA simplifies the specification by requiring students only to calculate the multiplier using the MPC.
This ensures consistency across exam questions and avoids the need for more complex approaches involving full national income accounts. It also reflects the MPC’s central role in determining how spending circulates through the economy.
Yes. If the MPC is very low, meaning most additional income is saved, the multiplier can approach 1 or even be less than 1 in practice.
This implies that injections have a very limited effect on national income, as the majority of income leaks out of the spending cycle.
The model assumes no changes in prices, spare capacity, and no leakages beyond savings.
In reality, taxes, imports, and inflation reduce the size of the multiplier.
Including these assumptions in answers shows awareness of real-world limitations, which can earn evaluation marks in longer exam questions.
If households spend all additional income, the MPC equals 1.
This creates an infinite multiplier in theory, as spending would continue without leakage.
In practice, this never occurs, but recognising it demonstrates clear understanding of the relationship between MPC and multiplier size.
Changes in saving and spending patterns directly affect the MPC.
Increased confidence → higher MPC → stronger multiplier.
Rising uncertainty or desire to save → lower MPC → weaker multiplier.
This highlights how behavioural shifts in households influence the impact of injections on the economy.
Practice Questions
Define the term multiplier and state the formula for calculating it using the marginal propensity to consume (MPC). (2 marks)
1 mark for correct definition: The multiplier shows how an initial change in spending leads to a greater final change in national income.
1 mark for correct formula: Multiplier = 1 ÷ (1 – MPC).
Using the concept of the marginal propensity to consume (MPC), explain why the size of the multiplier varies between economies. (6 marks)
Up to 2 marks for explanation of MPC (e.g. MPC measures the proportion of additional income spent on consumption).
Up to 2 marks for application to the multiplier (e.g. Higher MPC means larger multiplier; lower MPC means smaller multiplier).
Up to 2 marks for further development or application (e.g. In an economy with high saving rates, the multiplier effect is weaker; in an economy with high consumer spending, the multiplier effect is stronger).
Maximum: 6 marks.
