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

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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 2 months ago

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