Posted by Anjali Kaur on Oct 18, 2020

Investment Multiplier

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

  1. There exists a direct relationship between MPC and the value of the multiplier.
  2. There exists an inverse relationship between MPS and the value of the multiplier.
  3. 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.
  4. 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.
  5. The maximum value of investment multiplier is infinity when MPC = 1 or MPS = 0
  6. The minimum value of the investment multiplier is 1 when MPC = 0 or MPS = 1.
  7. 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

Taking reciprocal

Thank You for reading.

You can read the related post on macroeconomics:

Types of Employment Equilibrium

Concept of Short-Term Equilibrium

Aggregate Supply

Aggregate Demand

Introduction To Money

Central bank and its function

Process of credit creation

Precautions while calculating the national income

Real and nominal GDP

National income

National income formula list

Value-added method

Income method

Expenditure method

GDP and welfare

Domestic territory and national residents

Circular flow of income

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