Page 3 - lesson note--Income Determination and Multiplier44b

In the diagram it is observed that

|
ˈ
• With an additional investment, ∆ equilibrium point shifts to on .
• Equilibrium level of national income increases to O from O
2
1.
• The additional income is greater than additional investment due
1 2
1 2
to multiplier effect.

∆
1 2
= =
∆
1 2
Relationship between MPC and Multiplier

The economy attends equilibrium at the point where:

=
 = +

=> ∆ = ∆ + ∆

∆ ∆ +∆
=> =
∆ ∆
∆ ∆
=> 1= +
∆ ∆
∆
=> 1= +
∆
∆
=> 1− =
∆
1 ∆
=> =
1− ∆

1
From the above equation it is observed that: =
1−

• There always exists a direct relationship between MPC and Multiplier.

• When MPC =1, then multiplier is at its maximum i.e. ∞ (infinite)

• When MPC = 0 then multiplier is a its minimum i.e. 1.

Relationship between MPS and Multiplier: -

1
It is known that =
1−
1
=> = (AS, 1 − = )

• There always exists an inverse relationship between MPS and Multiplier.
• When MPS = 1, then multiplier is at its minimum. 1.
• When MPS = 0, then multiplier is at its maximum. ∞ (infinite).