Podcast
Questions and Answers
Who first developed the concept of the employment multiplier?
Who first developed the concept of the employment multiplier?
- John Maynard Keynes
- A.K. Dash
- RF Khan (correct)
- Milton Friedman
What does the investment multiplier express?
What does the investment multiplier express?
- The ratio of consumption to savings
- The change in interest rates due to investment
- The relationship between investment and final income (correct)
- The effect of employment on investment
What is the formula for calculating the multiplier K?
What is the formula for calculating the multiplier K?
- K = (1 - MPS) / I
- K = I / Y
- K = 1 / (1 - MPC) (correct)
- K = Y / I
If investment in the economy increases by 1 crore and national income rises by 3 crore, what is the multiplier value?
If investment in the economy increases by 1 crore and national income rises by 3 crore, what is the multiplier value?
Which statement about the marginal propensity to consume (MPC) is true regarding the multiplier?
Which statement about the marginal propensity to consume (MPC) is true regarding the multiplier?
In Keynesian theory, what must fill the gap between income and consumption?
In Keynesian theory, what must fill the gap between income and consumption?
What happens whenever an investment is made in the economy, according to the multiplier concept?
What happens whenever an investment is made in the economy, according to the multiplier concept?
What are the components that would need to be purchased for a construction investment, according to the multiplier process?
What are the components that would need to be purchased for a construction investment, according to the multiplier process?
What is the final increase in income assuming an initial investment of 100 crore and an MPC of 0.5?
What is the final increase in income assuming an initial investment of 100 crore and an MPC of 0.5?
Which of the following assumptions of the multiplier indicates that prices do not change?
Which of the following assumptions of the multiplier indicates that prices do not change?
In the multiplier process, the relationship between consumption and income is described by which statement?
In the multiplier process, the relationship between consumption and income is described by which statement?
What does the investment multiplier indicate when there is an increase in investment?
What does the investment multiplier indicate when there is an increase in investment?
When is the investment multiplier typically applied?
When is the investment multiplier typically applied?
What characteristic of the economy is required for the multiplier effect to operate?
What characteristic of the economy is required for the multiplier effect to operate?
In the aggregation of expenditures approach, what does the 45-degree line represent?
In the aggregation of expenditures approach, what does the 45-degree line represent?
What happens in the multiplier process if there is an instantaneous decrease in investment?
What happens in the multiplier process if there is an instantaneous decrease in investment?
What happens to the equilibrium level of income when autonomous investment increases?
What happens to the equilibrium level of income when autonomous investment increases?
What does a marginal propensity to consume (MPC) of 0 imply about the multiplier (K)?
What does a marginal propensity to consume (MPC) of 0 imply about the multiplier (K)?
Which of the following statements about the multiplier and MPC is true?
Which of the following statements about the multiplier and MPC is true?
If the multiplier (K) is equal to 1, what can be inferred about consumption and savings?
If the multiplier (K) is equal to 1, what can be inferred about consumption and savings?
What characterizes the multiplier effect when the MPC is equal to 1?
What characterizes the multiplier effect when the MPC is equal to 1?
Flashcards
Multiplier Effect
Multiplier Effect
A phenomenon where an initial change in spending leads to a larger final change in income.
MPC (Marginal Propensity to Consume)
MPC (Marginal Propensity to Consume)
The proportion of additional income that is spent on consumption.
Multiplier Formula
Multiplier Formula
The formula that calculates the multiplier. It generally involves 1 divided by 1-MPC(Marginal Propensity to Consume).
Investment Increase
Investment Increase
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Equilibrium Income
Equilibrium Income
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Investment Multiplier (K)
Investment Multiplier (K)
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Multiplier (K) Formula
Multiplier (K) Formula
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MPS (Marginal Propensity to Save)
MPS (Marginal Propensity to Save)
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Multiplier Process
Multiplier Process
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Keynesian Multiplier Theory
Keynesian Multiplier Theory
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Relationship between Investment and Income
Relationship between Investment and Income
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MPC
MPC
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Investment Multiplier
Investment Multiplier
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Multiplier (K)
Multiplier (K)
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Autonomous investment
Autonomous investment
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Induced Investment
Induced Investment
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Full Employment
Full Employment
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Closed Economy
Closed Economy
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Aggregate Expenditure
Aggregate Expenditure
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Study Notes
Multiplier
- The concept of the multiplier was first developed by R.F. Khan in 1931.
- Khan's multiplier tracked the impact of investment on employment.
- Keynesian multiplier is an improved version of Kahn's multiplier, demonstrating how a small investment affects final income.
- The multiplier is crucial in Keynesian economics for understanding income, employment, and output relationships.
- MPC (marginal propensity to consume) is less than 1. This means that increases in income don't lead to proportionate increases in consumption, leaving a gap that investment fills.
Multiplier Formula and Calculations
- Multiplier = 1 / (1 - MPC)
- K = Multiplier, Y = National Income, I = Investment
- Arithmetically, Y = K*I where K is the multiplier, I is initial investment, and Y is the final increase in income
Multiplier Process
- Initial investment triggers a chain reaction, generating income for various parties.
- Each round of spending further increases income in the economy.
- Consumption and saving are key factors in this process.
Assumptions of the Multiplier
- Autonomous and induced investments are separate.
- Full employment is not a condition
- Prices and wages remain constant.
- No foreign influences affect the closed economy.
- The economy is industrialized, and the MPC is constant.
- There are no time delays in the multiplier effect. Increases (decreases) in investment lead to proportionate changes in income instantaneously.
Investment and Saving Approach
- The savings curve (S) and investment curve (I) intersect at equilibrium (EO).
- An increase in investment (ΔI) shifts the investment curve to (I + ΔI), creating a new equilibrium (E1) with higher income (Y1).
Aggregate Expenditure Approach
- The aggregate expenditure curve shifts upward from C + I + G to C + I + G + ΔI in response to increased investment, creating a new equilibrium with higher income.
- The increase in income (ΔY) is greater than the initial increase in investment (ΔI).
Relationship Between MPC and Multiplier
- A higher MPC leads to a larger multiplier, and vice versa.
- The larger the MPC, the more the multiplier.
- If MPC = 0, K = 1 and if MPC = 1, K approaches infinity.
Deriving the Multiplier from MPS
- The multiplier (K) is calculated from the MPS (marginal propensity to save) as K = 1 / MPS
- the value of the multiplier varies directly with the MPC (marginal propensity to consume) and inversely with the MPS (marginal propensity to save).
Exercises and Examples
- Exercises are provided to illustrate how to calculate multipliers given MPC or MPS values.
Different Types of Multipliers
- The multiplier can be further categorized/expanded to include government spending, tax multipliers, and foreign trade multipliers, each affecting income differently.
- Balanced budget multiplier, a combined approach reflecting both government expenditure and taxation, typically equals 1.
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