G-Multiplier

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