Q.Specify the uses of Multiplier.
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The investment multiplier (k) measures how a change in autonomous investment produces a larger, magnified change in equilibrium national income. It is defined as k=1−MPC1=MPS1.
The multiplier works because one person's spending is another person's income. An initial injection of investment is spent, re-spent, and spent again in successive rounds, so total income rises by a multiple of the original investment. The size of that multiple depends entirely on the MPC.
The formula
k=ΔIΔY=1−MPC1=MPS1
Since MPC + MPS = 1, (1−MPC)=MPS, so the multiplier is simply the reciprocal of the marginal propensity to save.
How and why it works
Suppose the government/firms invest an extra ₹100 and MPC = 0.8. The ₹100 becomes income for the recipients, who spend 80% (₹80); that ₹80 becomes income for others, who spend ₹64; and so on. The rounds form a geometric series: 100(1+0.8+0.82+…)=100×1−0.81=100×5=₹500.
Worked illustration
With MPC = 0.8: k=1/(1−0.8)=1/0.2=5. A ₹100 crore rise in investment raises national income by 5×100=₹500 crore. If MPC were 0.5, k=2, and the same investment would raise income by only ₹200 crore.
Key relationships
- Higher MPC → higher multiplier (more of each round is re-spent). …
The investment multiplier shows how an initial change in investment leads to a magnified change in income; its uses lie in explaining income determination and guiding policy. This is a core Keynesian tool in the Tamil Nadu HSC Commerce syllabus. …
The multiplier explains how a change in investment produces a magnified change in income; it is used in income determination, in employment/fiscal policy, and in understanding trade cycles.
The investment multiplier (K) measures the ratio of the change in income to the change in investment: K = change in income / change in investment = 1/(1−MPC).
Uses of the multiplier:
- Income and output determination — it shows how equilibrium income is reached and how much income rises from a given rise in investment.
- Employment policy — it explains how increased investment raises income, output and employment, helping to combat unemployment.
- Fiscal / public-investment policy — governments use it to plan public expenditure, since a rupee of public investment raises income by more than one rupee. …
- CBSE 2025Set MARCH1 markMCQQ.If the MPC is 0.5, the value of multiplier is __________.(a) 0.2(b) 2(c) 20(d) 1/2
›Reveal solutionSolution
With MPC = 0.5, the multiplier equals 1/(1 − MPC) = 1/0.5 = 2 — option (b).
The investment multiplier (k) shows by how many times national income rises for a given rise in investment. Its formula is k = 1/(1 − MPC), where MPC is the marginal propensity to consume. This is a core numerical in the Tamil Nadu HSC Class-12 Economics syllabus (Consumption and Investment Functions).
Substituting MPC = 0.5: …
- CBSE 2025Set MARCH1 markMCQQ.The value of multiplier is __________.(a) 1/(1−MPC)(b) 1/MPS(c) 1/MPC(d) Both(a) and (b)
›Reveal solutionSolution
The multiplier equals both 1/(1 − MPC) and 1/MPS — option (d).
In the Tamil Nadu HSC Class-12 Economics syllabus (Consumption and Investment Functions), the investment multiplier is defined as k = 1/(1 − MPC).
Because the marginal propensity to consume and the marginal propensity to save always add to 1:
- MPC + MPS = 1, so MPS = 1 − MPC. …
- CBSE 2024Set 58/1/11 markMCQQ.Suppose for a hypothetical economy : C = 100 + 0·75Y (where C = Consumption and Y = Income); I₀ = 400 (I₀ = Autonomous Investment). Value of Investment Multiplier (K) would be ________. (Choose the correct alternative to fill in the blank) (A) 5 (B) 4 (C) 6 (D) 3
›Reveal solutionSolution
The investment multiplier quantifies how much national income changes for a given change in investment, and its value is determined by the Marginal Propensity to Consume (MPC). In this case, an MPC of 0.75 leads to an investment multiplier of 4.
The investment multiplier is a crucial concept in Keynesian economics that explains how an initial change in investment can lead to a much larger change in the economy's total income and output. This phenomenon occurs because spending by one person becomes income for another, who then spends a portion of that income, and so on, creating a chain reaction of expenditure.
The size of this multiplier effect depends directly on the Marginal Propensity to Consume (MPC), which is the fraction of additional income that households spend rather than save. If people spend a larger portion of any extra income they receive, the multiplier effect will be stronger, as more of the initial investment will circulate through the economy. Conversely, if people save a larger portion (meaning a lower MPC), the multiplier will be smaller.
To calculate the investment multiplier (K), we first need to identify the Marginal Propensity to Consume (MPC) from the given consumption function.
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Identify the Marginal Propensity to Consume (MPC):
The general form of a linear consumption function is C=Cˉ+cY, where C is consumption, Cˉ is autonomous consumption (consumption independent of income), c is the Marginal Propensity to Consume (MPC), and Y is income.
Given the consumption function: C=100+0.75Y.
Comparing this with the general form, we can see that the MPC (c) is 0.75.
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Apply the Investment Multiplier Formula: …
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- CBSE 2023Set 58/3/11 markMCQQ.(i) If in an economy, the value of Investment Multiplier is 5 and dissavings are (–)100 crore, the relevant savings at income level of ₹ 1,400 crore would be ₹ _______ crore. (Choose the correct alternative to fill up the blank) (A) 80 (B) 180 (C) 140 (D) 240(OR)(ii) The range of value of Investment Multiplier is always between _____ and _____. (Choose the correct alternative to fill up the blanks) (A) zero (0), infinity (∞) (B) one (+ 1), infinity (∞) (C) zero (0), one (+ 1) (D) minus one (– 1), plus one (+ 1)
›Reveal solutionSolution
- Part (a): K=5⇒MPS=0.2; S=−100+0.2Y; at Y=1400, S=₹180 crore — Option (B).
- Part (b): K=1/(1−MPC) with 0≤MPC<1, so K lies between 1 and infinity — Option (B).
Part (a)
The investment multiplier is K=MPS1. Given K=5:
5=MPS1⇒MPS=0.2
"Dissavings are (−)100 crore" means that at zero income, saving is −100 — this is the autonomous saving (the intercept). The saving function is:
S=−100+MPS⋅Y=−100+0.2Y
At Y=1400:
S=−100+0.2×1400=−100+280=180 …
- CBSE 2023Set 58/4/11 markMCQQ.(A) If the Marginal Propensity to Save (MPS) is 0·5, what will be the value of investment multiplier? (Choose the correct alternative)(a) 1(b) 2(c) 1·6(d) 1·45(OR)(B) An increase in National Income occurs by ₹ 3,000 crore, as investments increased by ₹ 1,200 crore. The value of investment multiplier would be ________. (Choose the correct alternative to fill up the blank)(a) 2(b) 2·5(c) 4(d) 5
›Reveal solutionSolution
Part (a): K=1/MPS=1/0.5=2 → option (b).
Part (b): K=ΔY/ΔI=3,000/1,200=2.5 → option (b).
The investment multiplier captures the Keynesian idea that an initial rise in investment sets off successive rounds of spending: one person's spending becomes another's income, part of which is re-spent, and so on. The total rise in income is therefore a multiple of the initial investment, and its size depends on how much of each extra rupee of income is spent (MPC) versus saved (MPS).
K=MPS1=1−MPC1=ΔIΔY
Part (a)
Given MPS=0.5:
K=0.51=2
So the correct alternative is (b) 2. …
- CBSE 2023Set MARCH1 markMCQQ.The Multiplier is calculated as ________.(a) 1/(1 - MPC)(b) 1/MPS(c) 1/MPC(d)(a) and (b)
›Reveal solutionSolution
The multiplier can be written as 1/(1 - MPC) or as 1/MPS, so option (d) is correct.
In the multiplier topic of the Tamil Nadu HSC Commerce syllabus, the investment multiplier (K) measures how a change in investment produces a magnified change in national income.
It is derived as:
- K = 1 / (1 - MPC), where MPC is the marginal propensity to consume.
- Since MPC + MPS = 1, we have 1 - MPC = MPS.
- Therefore K = 1 / MPS, where MPS is the marginal propensity to save. …
- CBSE 2020Set MARCH1 markMCQQ.The Multiplier is calculated as :(a) 1/(1 – MPC)(b) 1/MPS(c) 1/MPC(d)(a) and (b)
›Reveal solutionSolution
The multiplier equals 1/(1 – MPC), which is the same as 1/MPS.
The investment multiplier (k) measures how much national income rises for a given rise in investment. It is defined as:
k = 1 / (1 – MPC)
Since MPC + MPS = 1, we have 1 – MPC = MPS. Substituting gives:
k = 1 / MPS
…
- CBSE 2020Set MARCH1 markMCQQ.The term Super Multiplier was first used by :(a) Keynes(b) J.R. Hicks(c) R.G.D. Allen(d) Kahn
›Reveal solutionSolution
J.R. Hicks first used the term 'Super Multiplier'.
The multiplier (Keynes/Kahn) shows how a rise in investment raises income, while the acceleration principle shows how a rise in income (consumption) induces further investment. When these two interact and reinforce each other, the combined effect is larger than either …
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