Page 231 - DECO402_Macro Economics

Macroeconomic Theory

Notes In table I it has been described that how through combination of multiplier and accelerator, on value
of super multiplier being ks 10, income multiplication process from an initial investment of ` 100
crores, brings an increase up to ` 1000 crores in the income.
In period (duration) t + 1 fixed investment of ` 100 crores amounts is done in the economy. But
immediate induced consumption or investment does not happen. In period t + 2, from 100 income
of t + 1 period induced investment of 50 happens, because marginal consumption tendency is 0.5,
while in income from 100, induced investment of 40 takes place because (v = 0.4). increase in income
from period t + 1 to t + 2 is 90 = (50 + 40). Increase in income of various periods may be calculated like
this: ΔY t + 2 = cΔY t + 1 + t + v ΔY t + 1 = 0.5 × 100 + 0.4 × 100 = 90. Similarly, increase in income of period t
+ 3 will be ΔY t +3 = cΔY t + 2 + v ΔY t + 2 = 0.5 × 90 + 0.4 × 90 = 45 + 36 = 81. For knowing total increase in
income (column 6) increase in income of the current period (column 5) is added to increase in total
income of the (column 6) previous period. For e.g. increase in total income in the period t + 2, which is
190 (column 6), it is obtained by adding increase in income in this period 90 (column 5) to the increase
in total income in the previous period t + 1,100 (column 6).
Similarly, increase in total income in the period t + 3, 271= increase in income of this period 81 plus
190 from period t + 2 (column 6). This accumulative process of income multiplication goes on until,
induced consumption, induced investment and increase in income does not reduce to zero in period
t + n. If increase in consumption, income and investment from
period t + 1 to t + n is added, then total income increases to ` 1000
crores, total consumption becomes 500 crores and total investment
becomes 400 crores, on initial investment of 100 crores.
In figure 25.1 dynamic (Praavaigik) route of income is shown.
Income has been measured on vertical axis and time on horizontal
axis. On super multiplier being 10, curve OY expresses time route of
t
income. With time this curve increases and reaches new balance level
of income of OY and becomes flat. It shows that income increases Figure 25.1
1
at a decreasing income.

Did You Know? Hicks, for measuring the net effect of initial investment combined multiplier
accelerator with mathematical method and named it Super-multiplier.

Self Assessment

Multiple Choice Questions:
3. Income has been measured on vertical axis and time on ...................
(a) horizontal axis (c) non-horizontal
(c) parallel axis (d) odd axis
4. Hicks’s investment has been divided in autonomous investment and ............ investments.
(a) induced (b) multiplier
(c) super- multiplier (d) none of these
5. In period (duration) t + 1 ...................... of ` 100 crores amounts is done in the economy.
(a) investment (b) fixed investment
(c) disinvestment (d) none of these

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