Page 136 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 7: Concept of Multiplier

for government spending is based on military outlays, but today’s stimulus packages are Notes
heavily focused on infrastructure. Interest rates in many rich countries are now close to
zero, which may increase the potency of, as well as the need for, fiscal stimulus. Because of
the financial crisis relatively more people face borrowing constraints, which would increase
the effectiveness of a tax cut. At the same time, highly indebted consumers may now be
keen to cut their borrowing, leading to a lower multiplier. And investors today have
more reason to be worried about rich countries’ fiscal positions than those of emerging
markets.

Add all this together and the truth is that economists are flying blind. They can make
relative judgments with some confidence. Temporary tax cuts pack less punch than
permanent ones, for instance. Fiscal multipliers will probably be lower in heavily indebted
economies than in prudent ones. But policymakers looking for precise estimates are
deluding themselves.
Question:
Why do you think study of multipliers is important?

Source: The Economist

Limitation of Multipliers

The limitations of Multipliers are as follows:
1. If the investment does not come up in sufficient quantity, the multiplier will not work.
2. The greater the time lag, the lower would be the value of the multiplier.

3. Multiplier will not work properly if consumers’ goods are not available in plenty.
4. 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.

5. The multiplier can work only if there is underemployment.
Keynesian multiplier is static and instantaneous. It is only a mutology and it explains nothing at
all.

Task Prepare a brief report on ‘Value of multiplier and various leakages of multiplier’.

Self Assessment

Fill in the blanks:

5. ............................. is defined as the ratio of change in the equilibrium national income to
change in an autonomous variable.
6. A variable is ...................... when it is assumed not to be influenced by change in income.

7. Investment multiplier is the ratio of change in ............................. due to a given change in
investment.
8. The size of multiplier depends upon ...............................

9. The higher the saving, the ................................. would be the multiplier.

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