Investment Multiplier

Ever hear those statistics about how much money we’d save if we did preventative measures (things like brushing our teeth and, uh, getting an annual check-up)? If each of us ate an apple and walked for 30 minutes a day, we’d save gazillions in dollars via fewer people going to the doctor for heart problems...that kind of thing.

The investment multiplier carries the same idea, but re: investing money, instead of in your health. The investment multiplier refers to the magnitude of the impact of an increase in investment spending (public or private—doesn't matter) on the economy.

The idea is that investments aren’t just going toward the actual investment; they also ripple outward through those investments. For instance, renovating a rundown property downtown—with investments—turns the property into a functioning business, which provides jobs and stimulates spending and the economy in the area.

The investment multiplier tries to measure the aggregate "ripple effects" of the initial investment. Of course, how much more money people will spend depends on their marginal propensity to consume, so sometimes the investment multiplier can have more dampened effects than The Fed would like.