The multiplier is the ratio of increase in national income due to an increase in investment. The investment multiplier is represented by ‘K’.
K = Change in Y/ Change in Investment
K = 1/ (1-MPC)
K = 1/MPS
Let’s learn more about it
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Important points about investment multiplier, K
- There exists a direct relationship between MPC and the value of the multiplier.
- There exists an inverse relationship between MPS and the value of the multiplier.
- In the case of higher MPC, people spend a large proportion of their increase in national income on consumption. So, the value of the investment multiplier will be higher.
- In the case of lower MPC, people will spend a lesser proportion of the increase in national income on consumption. So, the value of the investment multiplier will be less.
- The maximum value of investment multiplier is infinity when MPC = 1 or MPS = 0
- The minimum value of the investment multiplier is 1 when MPC = 0 or MPS = 1.
- The investment multiplier can not be 0 or less than 1.
Relationship between K, MPC and MPS
AD = C + I
Y = C + I
Divide this by Change in Y
1 = MPC + Change in Investment/ Change in National income
1- MPC = Change in Investment / Change in National income
Thank You for reading.
You can read the related post on macroeconomics:
Types of Employment Equilibrium
Concept of Short-Term Equilibrium
Precautions while calculating the national income
Domestic territory and national residents
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