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Explain the process of multiplier in simple words not as per bookish language. 

Asked by abhishek240624 2nd November 2018, 3:41 PM
Answered by Expert

Multiplier effect

When an additional investment is made in the production then it leads to increase in additional income in the economy. i.e. a ratio between the increase in the level income and increase in the investment.

This increase in the level of income has direct relationship with the marginal propensity to consume.

Let’s assume, marginal propensity to consume is 0.5. Say Rs 100 an investment made in the production. Then income in the round 1 is Rs100. This income Rs 100 is used for consumption and saving. MPC is 0.5, it implies Rs 50 is spent and Rs 50 is saved. When we spend Rs 50, this expenditure will increase the income by Rs 50. Then income in the second round will be Rs 25. Income will keep increasing due to increase in consumption expenditure. In different rounds income is generated.

As we know additional investment means additional expenditure in the economy. Additional expenditure means additional income in the economy. Every time when we spend it is an injection to the level of income.  This injection will cause positive multiplier effect.

Answered by Expert 3rd November 2018, 11:39 PM
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