The initial government stimulus is the first round. Each dollar spent by the government ultimately becomes income to some people, and, once it has been put into their hands, they spend some fraction of it. That fraction is called the marginal propensity to consume (MPC). Thus the initial increase of expenditures feeds back into a second round of expenditures, made by people, not the government. This then feeds back again into income for yet more people, in an amount equal to the MPC dollars. These people in turn spend a fraction of the MPC, called the MPC squared dollars. This is the third round. But the story is not over yet. Round after round of expenditure follows, and so the sum of the effects of the initial expenditure of a single dollar by the government may be represented as $1 + $MPC + $MPC2 + $MPC3 + $MPC4. . . . The sum of all these rounds is not infinite; it is in fact equal to 1/(1 – MPC), a quantity that is called the Keynesian multiplier. But the sum may be much larger than the original government stimulus. If the MPC is, say, 0.5, the Keynesian multiplier is 2. If the MPC is 0.8, the Keynesian multiplier is 5.
