Question

Explain backward working of multiplier.

Show the backward working of multiplier.

Answer 1

The backward working of the multiplier refers to a situation where a decrease in investment or spending leads to a multiplied decrease in income, output, and employment. Just as an increase in investment causes income to rise through the multiplier effect, a fall in investment causes income to fall in multiple rounds.

Example:

If the multiplier is 4 and investment falls by ₹ 100 crores:

Decrease in income = 4 × ₹ 100 crores 

= ₹ 400 crores