Multiplier! (k)

The simple multiplier

The number of times total income increases corresponding to an increase in the investment is known as investment multiplier

Assumptions:

• Two sector economy
• Induced consumption and savings only
• Constant prices
• Some unemployed resources in the economy

Formula

 ${\displaystyle k={1 \over MPS}\ \ \ OR\ \ \ k={1 \over 1-MPC}}$
The simple investment can also be expressed by:
 ${\displaystyle {\Delta Y \over \Delta I}}$
• For example if Y (national Y) rises by $5000 as a result of an increase in investment of$1000 then the k coefficient is 5 (5000/1000).

Note:

1. The larger the MPC the larger the multiplier
2. The multiplier process also operates in reverse.