Question

Explain the theory, arithmetic and rationale behind the multiplier model.

Answer 1

Theory

Multiplier model theory states that the economy will flourish as the government spends. According to the theory, the net effect is greater than the dollar amount spent by the government.

Arithmetic

$Multiplier =\frac{ 1}{(1-MPC)}$

Rationale

The multiplier effect shows  the increase in final income arising from any new injection of spending.