Final answer:
The multiplier refers to how many times a dollar will turnover in the economy, based on the Marginal Propensity to Consume (MPC). It is calculated by 1/1 - F, where F is the percentage of savings, taxes, and expenditures on imports. The multiplier is important in understanding the impact of consumer spending on the economy.
Step-by-step explanation:
The multiplier refers to how many times a dollar will turnover in the economy. It is based on the Marginal Propensity to Consume (MPC) which tells how much of every dollar received will be spent. If the MPC is 80% then this means that out of every one dollar received by a consumer, $0.80 will be spent. This $0.80 is received by another person. In turn, 80% of the $0.80 received, or $0.64, will be spent, and so on. The impact of the multiplier is diluted when the effect of taxes and expenditure on imports is considered. To derive the multiplier, take the 1/1 - F; where F is equal to percent of savings, taxes, and expenditures on imports.