Sanjiv Singh 07MBA093
Saurabh Kumar 07MBA094
Sebastian Dona Mary 07MBA095
Senthil Kumar.V 07MBA096
The concept of multiplier was first developed by
F.A.Kahn in the early 1930s. The concept was later
refined by Keynes.
F.A.Kahn developed the concept of multiplier with
reference to the increase in employment,direct as well
as indirect,as a result of initial increase in investment
Later on Keynes propounded the concept of multiplier
with reference to the increase in total income,direct as
well as indirect,as a result of original increase in
investment and income.
Kahn’s Multiplier is known as “Employment
Multiplier” and Keynes multiplier is known as
“Investment or Income multiplier”.
The Value of Multiplier or
k = 1/1-MPC
The marginal propensity to consume remains constant
throughout as the income increases.
There is a net increase in investment over the
There is no any “time-lag”between the increase in
investment and the resultant increment in income.
Excess capacity exsists in the consumer good
In the two-sector model, a change in aggregate
demand is caused by a change in consumption
expenditure or in business investment or in both.
Consumption expenditure is however more stable
function of income.
A change is assumed in the aggregate demand
function due to a change in the business investment.
k C= a+ by
income Y1 Y2
To explain the cumulative upward and downward
swings of trade cycles that occur in a free enterprise
Its importance lies in the fiscal policy to be pursued by
the Government to get out of the depression and
achieve the full state of employment and also in the
foreign trade policies.
The role of Multiplier Effect in two sector model is
limited to :
a) Assessment of the overall possible increase in the
National Income due to “one-shot”increase in
investment or due to a “single injection” investment.
b) To explain the Economic Growth of the country.
We know the value of national output equals aggregate spending.
Thus we have,
Y = C+I
Let us now suppose that investment increases by ΔI. This will result
in an increase in aggregate consumption expenditure and real
Hence, any change in income Y is always equal to (ΔY) = ΔC + ΔI
Dividing both sides by Δy, we get :
1 = ΔC / ΔY + ΔI / ΔY
1 - ΔC / ΔY = ΔI / ΔY
since ΔC / Δy is the MPC and ΔI / Δy is reverse of multiplier.
We have 1/ multiplier = 1- MPC
Which yields the following result :
multiplier = 1 / 1- MPC.
Suppose an economy is in equilibrium and autonomous
business investment increases by Rs 100 million .
Due to this effect the total output increases by Rs 100
million. Further it also means an additional income of Rs
100million has been generated in the form of wages,interest
and profits.This makes the first round of income
Assuming MPC =0.8;total expenditure on consumer
goods=(100million ) X (0.8)=Rs 80million
This expenditure generates income worth Rs 8omillion in
Round Income Consumer spending Income generation
Ist round Nil 100.00
II nd round 80.00 80.00
III nd round 64.00 64.00
IV th round 51.20 51.20
V th round 40.96 40.96
Last round 0
Total income 500.00
MCP M=1/(1-MPC) Multiplier(M)
0.00 M=1/(1-0.00) 1.00
0.10 M=1/(1-0.10) 1.11
0.50 M=1/(1-0.50) 2.00
0.75 M=1/(1-0.75) 4.00
0.85 M=1/(1-0.85) 6.67
0.90 M=1/(1-0.9) 10.00
1.00 M=1/(1-1) infinity
The process ends when aggregate production equals
Static Multiplier is also known by names viz.
‘comparative static multiplier’ , ‘simultaneous
multiplier’ , ‘logical multiplier’ , ‘timeless multiplier’ ,
‘lagless multiplier’ .
It implies that change in investment causes in income
instantaneously. It means that there is no time lag
between the change in investment and change in
The moment a Rupee is spent on investment project,
society’s income increases by a multiple of Re 1.
The change in the income as a result of change in
investment is not instantaneous. There is a gradual process
by which income changes as a result of change in
investment.The process of change in income involves a
Since Multiplier process works through the process of
income generation and consumption ,the time lag involved
is the gap between the change in income and the change in
consumption at different stages.
The Dynamic Multiplier is essentially stage by stage
computation of the change in income resulting from the
change in investment till the full effect of the multiplier is
Payment of Past Debts
Purchase of Existing Wealth
Import of goods and services
Non-availability of consumer goods and services
Full employment situation
Macroeconomics(theory and policy)
by Richard T. Froyen