Q. 185.0( 1 Vote )

Define multiplier

Answer :

Investment multiplier shows the relationship between the change in investment and the change in income. It shows how a small change in the investment will cause multiple changes in the level of income. It was introduced by J M Keynes.


The investment multiplier shows the number of times the income will get multiplied with a small initial change in the investment. According to Keynes, when there is an increment of investment, income will be increased by an amount that is K times the increase in investment. Thus, K is the investment multiplier.


The value of the investment multiplier is determined by the value of Marginal Propensity to Consume (MPC). The size of the multiplier directly varies with the value of MPC. Higher the MPC, higher will be the size of the multiplier and vice-versa. Its value can range between 1 and infinity. The relationship between multiplier and MPC can be stated as:


Y = C+I


ΔY = ΔC+ΔI


ΔY = cΔY+ΔI; c = MPC


ΔY - cΔY=ΔI


ΔY (1- c) = ΔI


ΔY = ΔI/1-c


ΔY/ΔI = 1/1-c


K = 1/1-MPC; c=MPS


1/1-MPC=4


4(1-MPC) = 1


4 (MPS) = 1


MPS = 1/4 = 0.25


MPC = 1-0.25 = 0.75


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