Page 131 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes
Table 7.1: Working of Multiplier
Round Y C Y.MPC S Y— C
I 100 80 (=100×0.8) 20
II 80 64 (=80×0.8) 16
III 64 51.2 (=64×0.8) 12.80
IV 51.20 40.96 (=51.2×0.8) 10.24
. . .
. . .
. . .
all others 204.80 163.84 40.96
all rounds 500 400 (=500×0.8) 100

Leakages

1. Saving constitutes a leakage: the higher the saving, the lesser would be the multiplier.
2. If a part of the increased income is used for repayment of debt then the value of the
multiplier would be reduced.

3. Holding of idle cash will reduce the value of the multiplier.
4. Purchase of old stocks and securities.
5. Import.
6. If the elasticity of supply is low, then an increase in income may lead to only a price
increase.
7. Taxation reduces MPC. Therefore, the value of K is reduced.

Importance of the Multiplier

1. Multiplier summarises the working of the entire Keynesian model.
2. It analyses the process of income generation and propagation.
3. It points out that investment is the most important element in the theory of income and
employment.
4. It is a guide to public investment policy.
5. It is helpful for framing a suitable full employment policy.

6. It is necessary for the study of trade cycle, its trend and control.
7. According to Prof. Samuelson, the multiplier theory explains why an easy money policy
is ineffective and deficit spending is effective.

8. For increasing income and employment, investment should be started in a sector where
the multiplier may be greater.
9. It is an explanation of inflationary process.

10. It is used for explaining expansion in different fields of activity. In this context, different
concepts of multiplier, such as credit multiplier, consumption goods multiplier, balanced
budget multiplier, employment multiplier, and so on, can be used.

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