Video narration
How can one extra unit of autonomous spending create more than one unit of income? Think of a payment: part is spent, becoming someone else's income, then it is spent again. In a two-sector economy, equilibrium is Y equals C plus I. Consumption is C equals a plus bY. Substitute: Y equals a plus bY plus I. Rearrange: Y minus bY equals a plus I. Factor: Y times one minus b equals a plus I. So, Y equals a plus I divided by one minus b. The multiplier is one divided by one minus b. Here, b is the marginal propensity to consume: the fraction of extra income that is spent. With b stable, each payment starts another round; b of each round is re-spent. So, how can one unit create more? It becomes one divided by one minus b units. Credit: Dr Sebastian V Joseph.