Question

Show the forward working of multiplier.

Answer 1

The forward working of the multiplier refers to the process where an initial increase in investment leads to a greater (multiplied) increase in income, output, and employment.

• Suppose the government invests ₹ 100 crores in a project like road construction.
• This money is paid to workers and suppliers, who now have more income.
• These people spend a portion of their new income (based on the MPC – Marginal Propensity to Consume).
• That spending becomes income for others, who also spend part of it.
• This process continues through multiple rounds, each round smaller than the last, but together they create a total income increase greater than the initial investment.

Example:

If MPC = 0.8, then:

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

= `1/0.2`

= 5

So, an initial investment of ₹ 100 crores will increase total income by:

= ₹ 100 × 5 

= ₹ 500 crores