Keynesian Multiplier (HL only)

The Keynesian multiplier (HL) explains how an initial change in injections into the circular flow of income (exports, government spending, investment) causes a more than proportionate change in aggregate demand and real GDP because one person's spending becomes another's income. Its size depends on marginal propensities to consume, save, import and tax, so leakages reduce the multiplier. The concept matters for fiscal policy because it shows how much change in output follows a given change in government spending or taxes and how capacity and the shape of the AS curve affect outcomes.