why does consumption not have a positive multiplier?

My tutor said that only $$I$$, $$G$$, $$X-M$$ in AD can include a multiplier and that consumption does not create a multiplier effect. I understand that these factors affect my ability to consume and that one of these factors changing will affect my income and affect my MPC and create a multiplier. But, what if i take a loan? am i not creating further rounds of spending? I am increasing demand and increasing retailer incomes and increasing further rounds of spending so how is it not a multiplier?

• Hi anon, can you provide more context to your question? E.g. it seems like you're referring to the IS-LM or AS-AD models. Maybe you can also provide the equation to which your questions refers. Commented Jan 28 at 12:50

I think either you misunderstood your tutor or they were not clear.

What they likely meant was that increase in total $$C$$ won’t be multiplied by multiplier. I think this is best seen mathematically. I will omit X-N to simplify the math a bit and use the AD in an closed economy:

$$Y= C+I+G$$

Next what your tutor assumes implicitly is that both $$I$$ and $$G$$ are exogenously given, this is standard simplification assumption for beginners but it’s worth while noting that especially for $$I$$ this is generally not the case.

Next consumption depends on net income and it will be given by:

$$C(Y-T)= c_0 +c_1 (Y-T)$$

Where $$c_0$$ is autonomous consumption (special type of consumption that does not depend on income) $$c_1$$ is marginal propensity to consume, $$Y$$ is the aggregate income which is macroeconomically equivalent to AD and output, finally T are taxes (taxes are sometimes also dropped to simplify things for students so maybe you were not introduced to them).

So now our model looks like this:

$$Y= c_0 +c_1 (Y-T)+I+G$$

Since $$Y$$ is on both sides of equation we first have to solve for $$Y$$ to see clearly the effect different variables have on $$Y$$. Using simple algebra we find:

$$Y= \frac{1}{1-c_1}\left(c_0 +I + G - c_1 T\right)$$

The fraction $$\frac{1}{1-c_1}$$ is the multiplier, and only variables in the bracket affect the AD via the multiplier. As you can see in bracket there is no $$C$$ because $$C$$ was endogenous and dependent on income so it is not $$C$$ that drives higher income/AD but higher income/AD itself. There is self reinforcing loop, although this effect gets smaller through each circle (since MPC cannot be bigger than 1).

However, what I think your tutor did not appropriately explain is that AD still depends on the autonomous portion of consumption $$c_0$$. So some consumption does have this effect, but if we talk about aggregate consumption $$C$$ then no because $$C$$ is ultimately driven by $$Y$$.

Next you are probably asking why $$I$$ isn’t also driven by $$I$$ and that’s a good question, in real life it almost certainly is, save some special circumstances like liquidity trap, but in class when you learn the model for the first time $$I$$ will be assumed independent of income so the model solves easier. Later on you will see that when $$I$$ will be dropped from the solution.