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The Keynesian Multiplier in the economic theory refers to the increase in private consumption expenditure, investment and net government spending (calculated from gross government spending minus government tax revenue) that raises the total GDP by more than the increased amount.
So for an increase in the expense of 10 units, the total GDP will increase by more than ten units.
The main idea is to find the reasons for the intermitted recession and depression. Economists globally believe the widespread unemployment and low level of economic activities can be handled by massive government spending.
The change in total savings caused by a change in the total income results in getting the value of Marginal propensity to save (MPS). This theory can be applied to the whole economy. If the national income rises by 2 billion pounds, the national savings increase by 0.1 billion pounds, and the MPS equals 0.05.
This factor is related to the marginal propensity to consume. At lower levels, the consumer buys all that is necessary, and an increase in income is spent on basic needs. The income can be saved at higher income levels but does not imply higher savings.
There are theories related to models like household savings that include -
The MPS from one source of income is the same as the income from another, although certain economists disagree and state that savings can vary.
It is also believed that saving positively correlates with the variability or uncertainty of income. Also, the household-level sources of income are variables and less certain to be saved at a higher marginal rate.
It isn't easy to analyse the savings from different sources of income. However, when the government changes taxes, it affects the aggregate demand, and when the taxes are decreased, consumers have more disposable income, increasing spending. When the government raises taxes, households have less disposable income, decreasing spending.
The basic multiplier effect can be seen where the growth in tax lowers spending, and the tax decrease enhances spending. The impact of taxes on spending is negative, and the tax multiplier has a negative sign.
The life–cycle hypothesis assumes that for individuals who wish to smooth out their consumption over time and during studying, MPS can be 0. When they earn, they pay off their debts, and it may take a few years for them to earn and save for retirement.
Individual preference theory states that many young individuals do not save and are prone to present income bias. Some are risk-loving and may not save.
The council tax valuation is not a component of aggregate demand, but when it changes the consumer price indices, it leads to a change in the spending patterns by a small amount.
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