Question

What is the importance of the expenditure multiplier?

Answer 1

Meaning of Expenditure Multiplier (in economic terms)

The expenditure multiplier refers to the ratio of the total output change induced by an change in autonomous expenditure. It is computed as:

Expenditure Multiplier = 1/ (1 – MPC) = 1/MPS

Importance:

1. Importance in investment

Multiplier theory believes that an increase in investment leads to increase in level of income and employment in economy, thus has given investment as important factor in economy

2 Formulation of economic policies

Multiplier helps in formulating progressive policies, thus helps economy to move at a right speed.

3. Analyse of trade cycle

Multiplier analyse trade cycle, as it helps in estimating increase in income as a result of increse in investment in economy

4 Public Investments

Multiplier considers public investment to be important in increasing level of employment

5 Equality between saving and investment

Multiplier can help in bringing equality between saving and investment. Increase in investment results in raising income, which creates equality between saving and investment