Explain investment multiplier and its mechanism 2
Answers
The multiplier concept is central to Keynes' theory because it tells us that an increase in investment by a certain amount leads to an increase in income greater than the increase in investment. Thus, an investment has a “multiplier effect” on aggregate demand. ... Kahn's “employment multiplier.”
There exists a direct relationship between MPC and the value of multiplier. Higher the MPC, more will be the value of multiplier, arid vice-versa. The concept of multiplier is based on the fact that one person’s expenditure is another person’s income.
When investment is increased, it also increases the income of the people. People spend a part of this increased income on consumption. However, the amount of increased income spent on consumption depends on the value of MPC.
1. In case of higher MPC, people will spend a large proportion of their increased income on consumption. In such case, value of multiplier will be more.
2. In case of low MPC, people will spend lesser proportion of their increased income on consumption. In such case, value of multiplier will be comparatively less.
Thus, the value of multiplier depends upon the MPC.
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