y; I = I = Y = C + I Y = + .8y + 1y − .8y = + .2y = Y = Here, C = + .8y = + ( ) = ; S = = I After I is raised by , now I = , Y = + .8y + .2y = Here C = = . ( ) = ; S = = I Diagrammatic Explanation. At ° line y = C+ S It implies the variables in X axis and Y axis are equal. The MPC is assumed to be at .
(C = + .8y) The aggregate demand (C+I) curve intersects ° line at point E. Y = = . The original national income is . (C = + .8y = + .
( ) = ) When I is , y = , C = ; S = = I The new aggregate demand curve is C+I’ = + .8y + + C = ; S = = I . . . Working of Multiplier Suppose the Government undertakes investment expenditure equal to crore on some public works, by way of wages, price of materials etc.
Thus income of labourers and suppliers of materials increases by crore. Suppose the MPC is . that is %. A sum of crores is spent on consumption (A sum of Crores is saved).
As a result, suppliers of goods get an income of crores. They inturn spend crores ( % of cr). In this manner consumption expenditure and increase in income act in a chain like manner. Y = = .
Positive Multiplier and Negative Multiplier Effects Positive Multiplier When an initial increase in an injection of investment (or a decrease in a leakage) leads to a greater final increase in real