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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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Multiplier1
Multiplier

Y

450

C + I + I”

C + I

C

Aggregate

Demand

O

X

National Income


Multiplier2
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 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
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
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