GDP. When an initial increase in an injection of investment (or an increase in a leakage) leads to a greater final decrease in real GDP. Negative Multiplier - - Consumption and Investment Functions The final result is∆Y = + × / + ×[ / ] + ×[ / ] or, ∆Y = + x . + x ( .
) + x ( . ) = + + + . ... = that is × / - / × / / × = crores For instance if C = + .8Y, I = , Then Y = + .8Y + 1y − .8y = + .2Y = Y = / .
= →Point B If I is increased to , then .2Y = Y = / . = →Point D For increase in I, Y has increased by . This is due to multiplier effect. At point A, Y = C = i.e Autonomous consumption + MPC C = + .
( )= + = ; S= At point B, Y = C = + . ( ) = ; S = = I At point D, Y = C = + . ( ) = ; S = = I When I is increased by , Y increases by . This is multiplier effect (K = ) K = .
. Classification of Multiplier: . Static and dynamic multiplier i. Static multiplier is otherwise known as simultaneous multiplier, timeless multiplier, and logical multiplier.
= . Under static multiplier the change in investment and the resulting change in income are simultaneous.There is no time lag. There is also no change in MPC as the economy moves from one equilibrium position to another. ii.
Dynamic multiplier is also known as ‘sequence multiplier’. In real life, income level does not increase instantly with investment. In fact, there is a time lag between increase in income and consumption expenditure. .
. . Leakages of multiplier The multiplier assumes that those who earn income are likely to spend a proportion