THE SUPER MULTIPLIER

(THE MULTIPLIER – ACCELERATOR INTERACTION)

(Leverage Effect)

Hicks has combined the multiplier and the accelerator mathematically and
given it the name of the super–multiplier.

, where

Ks is the super–multiplier, ∆𝑦 is change in income, ∆𝐼𝑎 is change in autonomous

investment, c is the marginal propensity to consume, v the marginal propensity to
invest, and s is the marginal propensity to save(s=l–c).

The super–multiplier tells us that if there is an initial increase in autonomous

investment, income will increase by Ks times the autonomous investment.

i.e.,

∆𝑌= Ks.∆Ia

Suppose c = 0.5, v = 0.4 and autonomous investment increases by Rs.100

crore. The increase in aggregate income will be

∆𝑌 =

It shows that a rise in autonomous investment by Rs.100 crore has raised

income to Rs.1000 crore, which is higher than the income generated by the simple
multiplier.

The simple multiplier would have raised income to only Rs.200 crore, given the
value of K the multiplier as 2 (since MPC = 0.5).

Multiplier - Accelerator Interaction (Rs. in crore)

(Ks = 10)
 Induced Induced
Initial Increase in Total
Period Consumption Investment
investment Income Increase in
(t) (c = 0.5) (v = 0.4)
Ia (∆𝑌=∆C+∆I) Income
∆𝐶=MPCx∆𝑌 ∆𝐼=MPIx∆𝑌
(1) (2) (3) (4) (5) (6)

t+0 0 0 0 0 0

t+1 100 - - 100 100

190
t+2 100 50 40 90
(100+90)
271
t+3 100 45 36 81
(190+81)
343.9
t+4 100 40.5 32..4 72.9
(271+72.9)
409.51
t+5 100 36.45 29.16 65.61
(343.9+65.61)

… … … … … …

t+n 100 0 0 0 1000

The above table shows that the total income increases to Rs.1000 crore, total
consumption to Rs.500 crore, and total investment to Rs.400 crore, given the initial
investment (autonomous) of Rs.100 crore.

The dynamic path of income is shown in the following figure.

Y

Y1 Yt
Income

Path of Income

O X
Time

The curve OY1 shows the time-path of income with a super–multiplier of 10.
The curve rises with time and reaches the new equilibrium level of income Y1 and
flattens out. It indicates that income increases at a decreasing rate.
Diagrammatic Illustration

Y
S
I1

Savings and Investments

I
P2
I4

P1 I3

P
I2
I
I
O X
S M M1 M2 Income

Multiplier Accelerator

Leverage Effect

SS = Savings curve
II, II1 = Induced investment curves
II2, II3, II4 = Autonomous investment curves

Increase in income by MM1 - due to multiplier effect

(change in income due to change in autonomous investment)
Increase in income by M1M2 - due to accelerator effect
(change in income due to change in induced investment)

Increase in income by MM2 - due to leverage effect

(multiplier accelerator interaction)