What is the investment multiplier and how does it work on the spending in an economy?

Expert Solution

Investment Multiplier has an important place in current income and employment theory.

The concept of multiplier was first coined by FAC in the early 1930s. But then Quinn improved it even further. FA Kahn developed the concept of coefficients for direct and indirect job growth, resulting in an initial increase in investment and employment.
However, Keynes disseminated the concept of coefficients regarding direct and indirect total revenue growth as a result of initial increases in investment and earnings.

So while the Keynes factor is known as the 'job factor', the Keynes coefficient is known as the investment or earnings multiplier. The essence of the multiplier is that an increase in income, output, or employment is the first increase in investment. For example, if the investment is equal to Rs. 100 billion is made then revenue will not increase from Rs. 100 times more often.

If as a result of the investment of Rs. 100kg National income increases by Rs. 300 billion times 3. If as a result of the investment of Rs. 100k, total national income increases by Rs. 400 billion times 4. So the coefficient is the ratio of income growth and investment growth. If stance I means an increase in investment, and means Y means a continuous increase in income, then the coefficient is equal to the ratio of the increase in income (∆K) to the increase in investment (∆I)

Rahul Sunny answered 8 months ago

How does the multiplier process work when there is an initial decrease in autonomous spending?

What is the “spending multiplier” and how does it inform the predictions that Keynesian economists assert...

What is the “spending multiplier” and how does it inform the predictions that Keynesian economists assert for improvement in the economy as a result of fiscal policy?

7. What is the result of the spending multiplier if investment comes from savings? 8. Approximately...

7. What is the result of the spending multiplier if investment comes from savings? 8. Approximately how long is the period of the average real-estate-related business cycle?

If the economy is at full employment, increases in government spending: A) have a multiplier effect...

If the economy is at full employment, increases in government spending: A) have a multiplier effect on equilib rium output. B) have no effect on the aggregate price level. C) are primarily absorbed by price increases. D) reduce aggregate output

How do we create money? What is government spending multiplier?

1) How is the idea of the government spending multiplier, or multiplier effects in general, illustrated...

1) How is the idea of the government spending multiplier, or multiplier effects in general, illustrated in this video? 2) What could happen to Jacksonville MSA's local economy and the Southeast region if such a major project, which was initiated in June 2014, is completed and all needed state funding is secured?

How does the demand multiplier in the open economy compare with the one in the closed...

How does the demand multiplier in the open economy compare with the one in the closed economy (smaller, bigger or the same)? Explain briefly.

Describe how the multiplier works when the government decreases spending? Explain how the multiplier depends on...

Describe how the multiplier works when the government decreases spending? Explain how the multiplier depends on the MPC and the income tax rate. Provide intuition for your answer. What happens if MPC = 0? What happens if MPC = 1? Draw the Keynesian consumption function and relate the size of the multiplier to the slope of the Keynesian consumption function.

What is the difference between electron multiplier and photoelectron multiplier? How does the pressure in Mass...

What is the difference between electron multiplier and photoelectron multiplier? How does the pressure in Mass Spectrometry affect the response of photoelectron multiplier? How could photoelectron multiplier be used in Mass Spectrometry?

If the marginal propensity to consume is 0.75, how much is the spending multiplier? If the...

If the marginal propensity to consume is 0.75, how much is the spending multiplier? If the marginal propensity to consume drops to 0.5, how much is the new spending multiplier?

Question