The Multiplier: 

The multiplier is a term that is used to imply that an initial change in Aggregate Demand can have a greater final impact on equilibrium national income. This is known as the multiplier effect and it comes about because injections of demand into the circular flow of income stimulate further rounds of spending. The concept of the multiplier process became important in the 1930s when Keynes suggested it as a means to achieving full employment. This demand-management approach, meant to help overcome a shortage of business capital investment, measured the amount of government spending needed to reach a level of national income that would prevent unemployment. The higher the propensity to consume, the greater is the multiplier effect. The government can influence the size of the multiplier through changes in direct taxes. For example, a cut in the basic rate of income tax will increase the amount of extra income that can be spent on further goods and services. Another factor affecting the size of the multiplier effect is the propensity to purchase imports. If, out of extra income, people spend money on imports, this demand is not passed on in the form of extra spending on domestically produced output. The higher the reserve requirement, the tighter the money supply, which results in a lower multiplier effect for every dollar deposited. The lower the reserve requirement, the larger the money supply, which means more money is being created for every dollar deposited. It showed that any government spending brought about cycles of spending that increased employment and prosperity regardless of the form of the spending. As with an autonomous increase in investment spending, a given increase in government spending causes an increase in real GDP that is larger than the initial spending increase. Thus, there is a government spending multiplier that is similar to the autonomous spending multiplier. The value of the government spending multiplier is given by :

Government spending multiplier = 1/MPS = 1/ (1-MPC).