Change in investment and

Multiplier
Uses and limitations of multiplier
• Keynesian multiplier - Investment multiplier
• If planned growth is (dY) = Rs 100 billion
• Multiplier (m) = 5
• Investment required (dI) = dY/m = 20 billion
• limitations of multiplier
• Leakages – people may not spend all additional income; payment of past debts;
purchase of existing wealth; import of goods and services
• Non availability of consumer goods and services; full employment situation
• Applicability of multiplier to LDC – not applicable ; predominant agriculture
economy, vast disguised unemployment; low capital equipment; vast non-
monetized sector; vast self consumption
Income determination with government
sector: three sector model
• A three sector model – adding government to the two sector
economy
• The government influences economic activities via fiscal policy
• Inclusion of government sector introduces three variables: tax (T),
Changes in Aggregate demand and the
multiplier