Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40.
The marginal propensity to consume (MPC) for this economy is , and the expenditure multiplier for this economy is .
Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to . The total change in demand resulting from the initial change in government spending is .

The marginal propensity to consume (MPC) is the proportion of an increase in income that is spent on consumption. In this case, the MPC is 0.60, meaning that for each additional dollar earned, 0.60 is spent on consumption.

The expenditure multiplier is the factor by which an initial change in spending will affect total output in an economy. It is calculated as the reciprocal of the marginal propensity to save (MPS), which is the proportion of an increase in income that is saved. Since the MPC is 0.60, the MPS is 0.40, and therefore the expenditure multiplier is 1 divided by 0.40, which equals 2.5.

When the government increases purchases by 400 billion, the initial change in consumption will be 400 billion multiplied by the MPC of 0.60, which equals $240 billion.

The increase in income due to the initial change in government spending will lead to a second change in consumption, which is$240 billion multiplied by the MPC of 0.60, resulting in an additional $144 billion.

The total change in demand resulting from the initial change in government spending is the sum of the initial change in consumption and the second change in consumption, which is$240 billion + 144 billion = 384 billion.