Question

The increase in national income also leads to an increase in the income of the people. How?

Answer 1

One of the central concepts of modern macroeconomics is the multiplier. The Keynesian income determination model shows how the interaction of consumption and investment spending determines the level of national output.

Clearly, an increase in investment will increase the level of output and employment. Thus, an investment boom may bring a nation out of a deep or mild depression—by having a higher C + I schedule cut the 45° line at a higher level of equilibrium GNP.

Keynes realised that an increase in investment will increase the level of income and employment. He has also shown that an increase in investment will increase national income by a multiplied amount — by an amount greater than itself.

The multiplier is the number by which change in autonomous investment has to be multiplied to find out the resulting change in income. This amplified effect of investment on income is known as the ‘multiplier’.

Keynes pointed out that an increase in private investment will cause output and employment to expand; a decrease in investment will cause them to contract, through the investment multiplier.

The reason is simple enough. Since investment is one part of GNP, when it rises in value, the whole will also increase in value.