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
- 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
Taking reciprocal
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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