Question

Give two main leakages of multiplier.

Answer 1

1. Idle savings: Savings reduce immediate consumption spending, which is crucial for driving further production and income generation in the economy. Since the multiplier effect relies on repeated rounds of consumption spending, higher savings mean less income is circulated within the economy in each round, thereby lowering the overall multiplier. People saving income withdraw it temporarily from the spending stream, constraining demand.
2. Imports: They act as a leakage because when money is spent on foreign-produced goods, it leaves the domestic income flow. This reduces the income generated domestically, as the expenditure does not contribute to domestic production or employment. Consequently, a portion of income leaks out abroad, weakening the multiplier effect and limiting income expansion in the home economy.