Multiplier

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# Multiplier - PowerPoint PPT Presentation

Multiplier. Multiplier. Y. 45 0. C + I + I”. C + I. C. Aggregate Demand. O. X. National Income. Multiplier. Increase in aggregate demand will increase the equilibrium level of national income and decrease in aggregate demand decreases the equilibrium level of income

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### Multiplier

Multiplier

Y

450

C + I + I”

C + I

C

Aggregate

Demand

O

X

National Income

Multiplier
• Increase in aggregate demand will increase the equilibrium level of national income and decrease in aggregate demand decreases the equilibrium level of income
• Is there any specific relationship between the changes in aggregate demand and the change in national income?
• If yes, what determines this relationship?
• Answers to these questions lies in multiplier theory
MPC and Multiplier

MPC Multiplier

0.00 1.00

0.10 1.11

0.50 2.00

0.75 4.00

0.80 5.00

0.90 10.00

1.00 Infinity

The Use of Multiplier
• Used in economic planning and projections and assessment of possible effects of the changes in government policy
• Assessment of overall possible increase in the national income due to one-shot increase in investment or due to single injection investments
• Plan economic growth of the country

Planned growth Rs. 100 Billion

Multiplier = 5

Investment requirement = Rs. 20 Billion

Limitations of Multiplier

A . Leakages

1. payment of the past debts

2. Purchase on existing wealth

3. Imports of goods and services

B. Non-availability of consumer goods and services

C. Full employment situation