(k and β interaction) In order to measure the total effect of initial investment on income, Hicks has combined the k and β mathematically and given it the name of the Super Multiplier. The super multiplier is worked out by combining both induced consumption and induced investment. The super multiplier is greater than simple multiplier which includes only autonomous investment and no induced investment, while super multiplier includes induced investment. .
. . Leverage Effect The combined effect of the multiplier and the accelerator is also called the leverage effect which may lead the economy to very high or low level of income propagation. Symbolically Y= C + I A + I P Y = Aggregate income.
C = Consumption expenditure I A = autonomous investment I P = induced private investment Summary The chapter consumption function and investment function can be summarised under three heads. The consumption function deals with relationship between national income and consumption expenditure Viz APC, MPC and APS, MPS. The subjective and objective factors determine consumption function. The investment function includes autonomous investment and the induced investment, the functional relationship between interest rate and the investment, the role of MEC and rate of interest in determining the investment.
The multiplier is directly related to MPC and inversely related to MPS. The accelerator principle explains the effect of changing consumption expenditure upon volume of investment. The interaction of multiplier and accelerator is called super multiplier. - - Consumption and Investment Functions Glossary n Consumption function : the relationship between consumption and income n Autonomous Consumption : Autonomous consumption is the minimum level of consumption or spending that must take place even if a consumer has no disposable income, such as spending for basic necessities.
n Autonomous Investment : Additional investment that is independent of income n Average Propensity to Consume (APC): Ratio of the consumption expenditure to income. C/Y n Marginal Propensity to Consume (MPC) : Ratio of change in consumption to change in income. ΔC/ΔY n Average Propensity to Save (APS): Ratio of the saving to income. S/Y