Question

Explain and illustrate the concept of multiplier.

Explain the concept of multiplier.

Answer 1

The multiplier is an important concept in Keynesian economics. It explains how an initial increase in investment leads to a greater increase in total income and output in the economy.

Multiplier (K) = `1/(1-MPC)`

Example:

Suppose the government invests ₹ 100 crores in building roads. If MPC = 0.8, then:

Multiplier (K) = `1/(1-0.8)`

= `1/0.2`

= 5

Total increase in income = 100 × 5

= ₹ 500 crores

So, an initial investment of ₹ 100 crores leads to a total income increase of ₹ 500 crores due to the multiplier effect.