Page 139 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes The term investment multiplier refers to the concept that any increase in public or private
investment spending has a more than proportionate positive impact on aggregate income
and the general economy. The multiplier attempts to quantify the additional effects of a
policy beyond those that are immediately measurable.
Apart from investment multiplier, the other types of multipliers are tax multiplier,
government spending multiplier, balanced budget multiplier, foreign trade multiplier,
etc.

Multiplier will not work properly if consumers’ goods are not available in plenty.
There must be the motive of profit maximisation and autonomous investment. The
investment must be net investment; otherwise, the value of the multiplier will be reduced.

The concept of static multiplier implies that change in investment causes change in income
instantaneously. It means that there is no time lags between the chance in invest merit and
the change in income.
The concept of dynamic multiplier recognises the fact that the overall change in income as
a result of the change in investment is not instantaneous. There is a gradual process by
which income changes as a result of change in investment or other determinants of income.

7.5 Keywords

Balanced Budget Multiplier: A measure of the change in aggregate production caused by equal
changes in government purchases and taxes.
Dynamic Multiplier: It recognises the fact that the overall change in income as a result of the
change in investment is not instantaneous.
Foreign Trade Multiplier: The ratio of the resulting increase in domestic product to an addition
to exports.

Investment Multiplier: Refers to the concept that any increase in public or private investment
spending has a more than proportionate positive impact on aggregate income and the general
economy.

Multiplier: A numerical coefficient showing the effect of a change in one economic variable on
another.
Static Multiplier: It implies that change in investment causes change in income instantaneously.

Tax Multiplier: The ratio of the change in aggregate output (or gross domestic product) to an
autonomous change in a taxes.

7.6 Review Questions

1. What do you mean by Investment Multiplier? Explain its working.

2. Algebraically derive the value of Investment Multiplier.
3. Explain Government Spending Multiplier. Is it different from the Investment Multiplier?
4. Describe the concept of tax Multiplier.

5. Explain Balanced Budget Multiplier.
6. With the help of an example, show how investment multiplier is calculated.
7. Contrast static and dynamic multiplier.

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