ECONOMICS
+25 XP earned 🎉
Unit 3 · Income & Employment
🚀

Investment and the Multiplier

Hard 30 minExam importance ★★★★★ Sandeep Garg — Macroeconomics, Ch 7
Unit Quiz

1 Quick Explanation 1–3 min

Investment is autonomous in the simple model — fixed spending on capital that doesn't depend on income.

The multiplier (k) magnifies every rupee of investment into several rupees of income: k = 1/MPS.

2 Detailed Notes

Key points

Investment types

  • Autonomous investment: independent of income level — determined by expectations, technology, interest rates. Example: government building highways.
  • Induced investment: depends on income/profit levels. In the simple Keynesian model we assume autonomous investment (I = Ī).

Important

Why is investment autonomous?

In the short run, investment is treated as given (autonomous) so we can isolate how changes in income are determined by AD. The investment line in the AD diagram is horizontal.

Definition

The multiplier

The multiplier (k) is the ratio of the change in income to the change in investment that caused it. k = ΔY/ΔI = 1/(1−MPC) = 1/MPS.

Example

How it works

Investment rises ₹100, MPC = 0.8. Round 1: income +100, consumption +80. Round 2: income +80, consumption +64… Total ΔY = 100 + 80 + 64 + … = 100 × 5 = ₹500. k = 5.

Formula

Working of multiplier

k = ΔY ÷ ΔI = 1 ÷ (1 − MPC) = 1 ÷ MPS ΔY = k × ΔI

Higher MPC → higher multiplier (each round of spending keeps more inside the economy).

In One Minute

Autonomous investment = income-independent (horizontal line). Multiplier k = 1/MPS = 1/(1−MPC). ΔY = k × ΔI. Higher MPC → bigger multiplier.

Important for Exam

  • ⭐ 1-mark: k = 1/MPS.
  • ⭐ 3-mark numerical: given MPC or MPS and ΔI, find ΔY.
  • ⭐ Why is investment autonomous (assumption).
  • ⭐ Multiplier working table (6 marks, with 45° diagram).

Watch & Learn

INVESTMENT MULTIPLIER - COMPLETE CONCEPT Watch on YouTube

INVESTMENT MULTIPLIER - COMPLETE CONCEPT

by CA Parag Gupta

Why watch? Full derivation with working table.

Open on YouTube
INVESTMENT MULTIPLIER - COMPLETE CONCEPT Watch on YouTube

INVESTMENT MULTIPLIER - COMPLETE CONCEPT

by CA Parag Gupta

Why watch? Solved board numericals for k, MPC, MPS.

Open on YouTube

When a verified best video is available it plays right here; the button always opens the same video on YouTube. Topics without a verified pick fall back to a live YouTube search from trusted CBSE channels.

Your Personal Note

Notes are saved on this device and appear on your Bookmarks page.