The Investment Multiplier

The increase or decrease in the

autonomous investment will shift the
equilibrium level of income in an
upward or downward depending upon
the magnitude of change in investment.
Keynes theory of multiplier explains the
extend of change in income. The theory
of employment multiplier was given by
R.F. Khan.
The investment multiplier (K) is defined

Three concepts of multiplier

Instantaneous or timeless multiplier

Comparative static multiplier
Dynamic multiplier.
Instantaneous multiplier explains
increase in the income immediately
with investment

Multiplier - Assumptions
MPC Remains constant
Government expenditure and tax is constant
There is autonomous investment in the
economy
Economic system is closed
No time-lag in multiplier process
There is surplus capacity in the economy
It is an industrial economy
No change in prices

Equations

Y=c+I
Y=cY+I
Y-cY=I
Y(1-c)=I
Y=I/1-c
Y/I=1/1-c
K=1/1-c or K=1/MPS
MPC is greater than 0 and less than 1

Working of Multiplier

Leakages of multiplier

Savings
Strong liquidity preference
Purchase of old stocks and securities
Debt cancellation
Price inflations
Net imports
Undistributed profits
Taxation
Excess stock of consumption goods

Criticism
According to Professor Hansen its
mere arithmetic multiplier.
No time lag.
Talks only about autonomous
investment.
Linear relationship