Multiplier

In Keynesian economic theory, a factor that quantifies the change in total income as compared to the injection of capital deposits or investments which originally fueled the growth. It is usually used as a measurement of the effects of government spending on income, and it can be calculated as one divided by the marginal propensity to save.

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Keynesian economic theory contends, among other things, that any injection into the economy via investment capital, government spending or the like will result in a proportional increase in overall income at a national level. The basic premise of this theory is that increased spending will have carry-through effects which result in even greater aggregate spending over time. The multiplier itself is an attempt to measure the size of those "carry-through effects".

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The multiplier has two major applications in finance and investments.

1. investment multiplier or Keynesian multiplier: multiplies the effects of investment spending in terms of total income. An investment in a small plant facility, for example, increases the incomes of the workers who built it, the merchants who provide supplies, the distributors who supply the merchants, the manufacturers who supply the distributors, and so on. Each recipient spends a portion of the income and saves the rest. By making an assumption as to the percentage each recipient saves, it is possible to calculate the total income produced by the investment.

2. deposit multiplier or credit multiplier: magnifies small changes in bank deposits into changes in the amount of outstanding credit and the money supply. For example, a bank receives a deposit of $100,000, and the Reserve Requirement is 20%. The bank is thus required to keep $20,000 in the form of reserves. The remaining $80,000 becomes a loan, which is deposited in the borrower's bank. When the borrower's bank sets aside the $16,000 required reserve out of the $80,000, $64,000 is available for another loan and another deposit, and so on. Carried out to its theoretical limit, the original deposit of $100,000 could expand into a total of $500,000 in deposits and $400,000 in credit.

A factor, used as a guide, applied by multiplication to derive or estimate an important value.
Example: A Gross Rent Multiplier of 6 means that property renting for $30,000 per year can be sold for 6 times that amount, or $180,000.
Example: A population multiplier of 2 means that, for each job added, 2 people will be added to a city's population.