Final answer:
The monetary multiplier is similar to the fiscal multiplier available to the government, illustrating how initial government spending leads to a greater increase in aggregate expenditure through the multiplier effect. The multiplier is calculated using the Marginal Propensity to Consume (MPC) and accounts for the percentage of savings, taxes, and expenditures on imports.
Step-by-step explanation:
The monetary multiplier is similar to the fiscal multiplier available to the government. The multiplier effect refers to the process by which an original increase in spending (such as government spending) leads to a larger increase in aggregate expenditure. For example, an initial government expenditure of $100 could ultimately raise aggregate expenditure by $213, making the multiplier in this scenario 2.13, as every dollar of initial spending generates more than two dollars in economic activity.
The multiplier effect is based on the Marginal Propensity to Consume (MPC), which you can find by dividing the change in consumer spending by the change in disposable income. If the MPC is 80%, this means that when consumers receive an extra dollar, they spend 80 cents of it. This spend-circulate process keeps recurring, and each round sees some of the money saved, taxed, or spent on imports, reducing the impact of the additional round of spending. To calculate the multiplier, you would use the formula 1 / (1 - MPC), accounting for the leakages into savings, taxes, and imports.