Government Expenditure Multiplier: G-Multiplier

Like private investment, an increase in government spending results in an increase in national income. Thus, its
effect on national income is expansionary. There is a limit to private investment. Thus, to stimulate income the gap
has to be filled up by government expenditure.

However, the increase in income is greater than the increase in government spending. The impact of a change in
income following a change in government spending is called government expenditure multiplier, symbolized by KG
The government expenditure multiplier is, thus, the ratio of change in income (Y) to a change in government
spending (G).

KG = Y/G and Y = KG. G

In other words, an autonomous increase in government spending generates a multiple expansion of income. How
much income would expand depends on the value of MPC or its reciprocal, MPS. The formula for K G is the same as
the simple investment multiplier, represented by KI.

Its formula (i.e., KG) is: