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In: Business and Management

Submitted By pearlAngel
Words 441
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Keynes’ Income or Investment Multiplier:
Keynes’ income multiplier tells us that a given increase in investment ultimately creates total income which is many times the initial increases in income resulting from that investment. That is why it is called income multiplier or investment multiplier. Income multiplier indicates how many times the total income increases by a given initial investment.
Suppose Rs. 100 million are invested in public works and as a result there is an increase of Rs. 300 million in income. In this case, income has been increased 3 times, i.e., the multiplier is 3. If ΔI represents increase in investment, ΔY indicates increase in income and K is the multiplier, then the equation of multiplier is as follows:
The multiplier is the numerical co-efficient showing how large an increase in income will result from each increase in investment. The multiplier is the number by which the change in investment must be multiplied in order to get the resulting change in income. It is the ratio of change in income to the change in investment. If an investment of Rs. 50 million increases income by Rs. 150 million, the income multiplier is 3 and if Rs. 200 million, the multiplier is 4 and so on.
In the following multiplier equation, the relationship between income and investment is determined through marginal propensity to consume: Where:

(mps: Marginal Propensity to Save)
Therefore, the third multiplier equation is:
It should be noted that the size of multiplier varies directly with the size of mpc. When the mpc is high, the multiplier is high and when the mpc is low, the multiplier is also low.
The multiplier works not only in money terms but also in real terms. In other words, the increase in income takes place not only in the form of money but in the form of goods and services.
Keynes multiplier theory is also very helpful in the

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