Unraveling the Multiplier Effect: Its Role in Macroeconomics and Investing

April 11, 20238 min read
Unraveling the Multiplier Effect: Its Role in Macroeconomics and Investing
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways 

  • The multiplier effect describes how an initial change in economic variables can have a more significant overall impact on the economy. 
  • Multipliers range from the Keynesian multiplier to the money supply multiplier, each with distinct economic implications. 
  • The multiplier effect plays a crucial role in businesses and macroeconomics, influencing factors like GDP, market share, and aggregate demand. 
  • For investors, understanding the multiplier effect can inform investment strategies, especially in the context of public equities and fixed income products.

The multiplier effect is a central mechanism in macroeconomics, illustrating how a change in an economic factor, such as government spending or investment, can instigate a more substantial change in another variable, like the gross domestic product (GDP). When government expenditure or private investment infuses capital into the economy, this not only affects the immediate recipients of such funds but also stimulates further economic activity. As recipients spend their new income, it creates income for others, driving a cascade of spending that can boost overall economic output. 

The Multiplier Equation: A Numerical Representation 

The fundamental equation for calculating the multiplier is 1/(1-MPC), where MPC stands for the marginal propensity to consume. This figure represents how much of an additional unit of income—say, one dollar—an individual, a household, or an economy spends rather than saves. When the MPC is high, people are spending a significant portion of their additional income, which can amplify the multiplier effect and, by extension, increase the GDP. Essentially, a high MPC fuels economic activity, while a lower one may signal increased saving, resulting in a smaller multiplier. 

Witnessing the Multiplier Effect in Action 

Let’s consider a tangible scenario to illustrate the multiplier effect in action. Suppose the government decides to boost the economy and injects $1 million into it. If individuals within this economy have an MPC of 0.8, meaning they spend 80 cents out of every extra dollar they earn, the resulting multiplier would be 5 (calculated using the multiplier formula). 

This multiplier means that the original injection of $1 million could potentially increase GDP by up to $5 million. The original $1 million boosts the income of certain individuals or businesses, which then spend $800,000 (0.8 of $1 million) of that income, providing a further $800,000 in income to others. These second-round recipients then spend $640,000 (0.8 of $800,000), and so on. The total increase in income sums to $5 million, illustrating how the multiplier effect can stimulate economic activity and foster growth on a larger scale. 

The Keynesian Multiplier and Its Influence 

The Keynesian multiplier, named after economist John Maynard Keynes, puts forth the idea that an increase in fiscal expenditure, especially during a downturn, can lead to a more significant increase in national income and GDP. It is a key pillar of Keynesian economics, which advocates for proactive fiscal policy as a tool for economic stabilization. 

The Keynesian multiplier underscores the potential of government spending to stimulate economic activity beyond the initial amount spent. For instance, in a recession, increased government expenditure can provide a much-needed boost to demand, leading businesses to increase production, hire more workers, and potentially spark a cycle of economic recovery. This underscores the vital role of fiscal policy in managing economic fluctuations and advancing towards economic stability. 

The Money Supply Multiplier: Managing the Money Flow 

The money supply multiplier, often associated with fractional reserve banking, represents the degree to which an increase in the monetary base can lead to an increase in the overall money supply. The central bank typically uses this multiplier to control the reserve ratio, influencing lending capabilities and, consequently, aggregate demand. 

Unpacking Various Types of Multipliers 

Economic models often consider a range of multipliers, including the fiscal multiplier, investment multiplier, earnings multiplier, and equity multiplier. These represent different ways in which initial changes in economic variables can lead to more significant changes in output, income, or wealth. 

The Fiscal Multiplier: Impact on GDP 

The fiscal multiplier is a concept rooted in Keynesian economics, and it provides an analysis of how changes in government spending or tax policies can influence the gross domestic product (GDP). The fiscal multiplier measures the effect of a change in government spending on aggregate demand, which in turn influences GDP. 

When the government increases spending or cuts taxes, it injects more money into the economy, which spurs increased consumption and investment. This additional spending then creates income for businesses and households, who go on to spend some of this additional income, creating a multiplier effect. The value of the fiscal multiplier can be greater than one if the extra spending stimulates further rounds of spending in the economy. Conversely, reductions in government spending or increases in taxes can have the opposite effect, reducing GDP. 

The Investment Multiplier: A Catalyst for National Income 

The investment multiplier, another key concept in economics, represents the ratio of a change in national income to the change induced by an increase in investments. An initial increase in investment leads to increased income for those directly receiving the investment. These recipients then spend part of their new income, leading to additional increases in income for others. 

The investment multiplier captures the magnifying effect that an initial increase in investment can have on income and ultimately on GDP. It underscores the role of investment as a catalyst for economic growth, given that an increase in investment can lead to a larger increase in income and output, thus stimulating the economy more broadly. 

The Earnings Multiplier: A Valuation Tool 

In the realm of finance and investments, the earnings multiplier, also known as the price-to-earnings (P/E) ratio, is a vital tool. It is the ratio of a company’s stock price to its per-share earnings or profits. This ratio is commonly used to assess the relative value of companies’ shares. 

The earnings multiplier can provide a snapshot of how the market values a company relative to its earnings. A high P/E ratio could indicate that the market has high expectations for a company’s future growth and is willing to pay a premium for its stock. Conversely, a low P/E ratio might suggest that the market has lower expectations for a company’s future performance. 

The Equity Multiplier: A Measure of Financial Leverage 

Lastly, the equity multiplier is a critical metric in assessing a company’s financial structure. It measures a company’s financial leverage by illustrating how much of its assets are financed by stockholders’ equity as opposed to debt. The equity multiplier is calculated by dividing a company’s total assets by its total equity. 

A higher equity multiplier suggests a company is using more debt to finance its assets, which can mean higher risk as the company has a greater obligation to creditors. However, it can also lead to higher returns on equity if the company successfully earns more from its assets than the cost of the associated debt. On the other hand, a lower equity multiplier suggests that a company is less reliant on debt, which might indicate lower risk but also potentially lower returns on equity. The equity multiplier provides a lens into a company’s capital structure and its approach to financing and risk. 

Businesses and the Multiplier Effect 

The multiplier effect has substantial implications for businesses. Increased government spending or lowered taxes can stimulate consumer spending, benefiting businesses in the private sector. A stronger fiscal multiplier can, in turn, lead to enhanced business performance and increased market share. 

Multiplier Effect and Macroeconomic Impact 

The multiplier effect is central to understanding macroeconomic dynamics. By influencing variables like GDP, aggregate demand, exchange rates, and economic growth, multipliers help policymakers manage the ebb and flow of economic activity, particularly during periods of economic downturn. 

The Multiplier’s Implication for Investments 

For investors, the multiplier effect has notable implications. Changes in fiscal or monetary policy that stimulate the multiplier effect can influence the performance of public equities or fixed income products. By understanding the workings of the multiplier effect, investors can make informed decisions and mitigate risks. 

Less Volatile Options: A Glimpse into Private Markets 

As an alternative to public markets, private markets often offer less volatile options for investors. Unlike public equities, private company stocks are not subject to the same market fluctuations, providing a buffer against economic turbulence that might be influenced by the multiplier effect. 

Rise above Volatility

Diversify beyond the stock market with Yieldstreet.

Alternative Investments and Portfolio Diversification

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary 

Understanding the multiplier effect and its different types—ranging from the Keynesian multiplier to the money supply multiplier and more—can shed light on economic dynamics. Not only does it provide insight into the interplay of fiscal policy and macroeconomics, but it also helps businesses and investors navigate economic shifts more effectively.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure