Question

"Keynes investment multiplier is the coefficient relating to an investment to increment of income." Discuss this statement.​

Answer 1

Explanation:

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Answer 2

Answer:

Concept:

         In his essay titled "The Relation of Home Investment to Unemployment" published in the Economic Journal in June 1931, R.F. Kahn introduced the multiplier concept for the first time. The Employment Multiplier was Kahn's multiplier. Keynes developed the Investment Multiplier after borrowing Kahn's concept.

Explanation:

1. The Investment Multiplier:

   In the words of Hansen, Keynes’ investment multiplier is the coefficient relating to an increment of investment to an increment of income, i.e., K=∆Y/∆I, where Y is income, I is investment, ∆ is change (increment or decrement) and K is the multiplier.

• The multiplier operates in both directions—forward and backward. We first examine its forward functioning. According to the multiplier theory, a change in investment has a cumulative impact on income through its impact on consumption spending.

Importance of Multiplier:

• The multiplier hypothesis emphasizes the value of investment in the notion of income and employment. Short-term fluctuations in income and employment are caused by changes in the rate of investment since the consumption function is steady throughout this time.

Equal Savings and Investment:

• Additionally, it aids in achieving parity between investments and savings. If saving and investing habits diverge, an increase in investment causes income to rise through the multiplier effect by a greater amount than the increase in initial investment Savings grow and equal investment as a result of the rise in income.

2. The Dynamic or Period Multiplier:

• The dynamic multiplier has to do with how long it takes to generate income. Depending on the assumption made about the relevant era, the multiplier process may take months or even years to finish the series of adjustments in income and consumption.

3. The Employment Multiplier:

•         R.F. Kahn first proposed the idea of an employment multiplier in 1931 as a ratio between the growth in both total employment and primary employment, i.e., K1 = N/N1, where K1 stands for the employment multiplier, N1 represents the growth in both total employment and N1 represents the growth in primary employment.

• Dillard points out the employment multiplier are useful for showing the relation between primary and secondary employment from public works. But Keynes’ conception is superior to Kahn’s because in the words of Goodwin, “He gave it the role it plays today by transforming it from an instrument for the analysis of road building into one for the analysis of income building.”

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