Instruction

1

According to the theory of Keynes, an increase in investment triggers the multiplier process, which is reflected in the increase in national income by a greater amount than the original increase in investment. This effect Keynes called the effect of

**the multiplier**. k (**multiplier**) = growth income / growth investments. Marginal propensity to savings and consumption depends on the strength of the effect of**the multiplier**. If the values of these parameters relatively constant, to determine**the multiplier**is not difficult.2

To calculate

I – investments; C – consumption; Y – national income; the MPS is the marginal propensity to save and MPC is the marginal propensity to consume.

**the multiplier**, assume that:I – investments; C – consumption; Y – national income; the MPS is the marginal propensity to save and MPC is the marginal propensity to consume.

3

Since Y = C + I, the increase in income(Y) will be equal, respectively, to the amount of growth of consumption(C) and investment growth(I).

4

According to the formula, the marginal propensity to consume: MPC = C / Y, we get: C = Y * Mrs.

Substitute this expression into the equation above (Y = C + I).

Will get: Y = Y * MPC + I.

Hence: Y * (1 - MPC) = I.

Substitute this expression into the equation above (Y = C + I).

Will get: Y = Y * MPC + I.

Hence: Y * (1 - MPC) = I.

5

Next: the increase of income Y = (1 / 1 – MPS) * a rate of investment I, but since k = increase in Y / increase I, therefore gain Y = k * increment I. This means that k = 1 / 1 – MPS = 1 / MPS where k is

**the multiplier**of the investment.6

Thus,

**the multiplier**of investment is the reciprocal of the relative to the marginal propensity to save. The multiplier operates in both forward and back.Useful advice

Investment multiplier reflects the positive impact of the investment on other sectors. John.M. Keynes his theory offered in addition to the investment to adjust the national income by raising taxes, for the withdrawal of savings in order to increase the investment of the state.

The multiplier effect can be caused not only by the increase of investment and other components of Autonomous expenditure (total spending). Then talking about the multiplier of total expenditures; it also operates in the reverse direction.

The multiplier effect can be caused not only by the increase of investment and other components of Autonomous expenditure (total spending). Then talking about the multiplier of total expenditures; it also operates in the reverse direction.

# Advice 2 : What is a tax multiplier

The tax multiplier is a negative coefficient, which shows the change in national income depending on the tax changes. Increasing taxes leads to lower incomes.

## The essence of the tax multiplier

In the economy are the so-called multiplier effects. It occur in cases where the change in costs leads to a larger change in equilibrium GDP.

The most famous is the multiplier of Keynes. It reflects how a growing level of income as a result of growth of the state and other expenses.

The tax multiplier has less impact on reducing demand than the multiplier of public expenditure increase. It has the following effect - when tax increases reduces the gross national product, while decreasing - it is growing. It should be noted that between changes in tax rates and national income is always present with the period from several months to a year.

A stronger impact of public expenditures on domestic consumption due to their direct occurrence in the aggregate demand.

How does the tax multiplier? So, if you reduce taxes for the population of consumers you receive the opportunity to spend more, they increase their spending on consumer goods. Reducing the tax burden for entrepreneurs stimulates growth of investments.

The impact of government spending and taxes on income and consumption is mainly in the choice of government instruments of fiscal (budgetary-tax) policy. If the priority extension of public sector of economy and increase costs. This leads to an increase of income, production of goods and to lower unemployment. However, these positive effects are achieved only if the growth of government spending due not only to the increase in the tax burden.

A stronger impact of public expenditures on domestic consumption due to the fact that they are directly included in the aggregate demand and their changes affect its value.

If necessary, containment of inflation rise increase taxes. Today the budgetary-fiscal policy is one of the main means of achieving sustainable and sustained economic development.

If government spending and taxes simultaneously increased by the same amount, the equilibrium production will also increase by the same amount. When the balanced budget multiplier is always equal to one.

## Calculation of tax multiplicator

Changes in tax policy usually has the ability to influence the economy multidirectional impact. It is the tax multiplier allows you to translate interventions into a quantitative value. It is equal to the ratio of marginal ability to consume to the limit of the ability to save negative value.

For example, the value of the maximum ability to consume is 0.9, and saving - 0.3. Then the tax multiplier is -3. Consequently, the increase in taxes on the $ 1. reduces national income by $ 3.

As the government spending multiplier, the tax multiplier can operate in both directions.