Class 12 Macro Economics Notes · CBSE

Concept of Investment Multiplier

Concept of Investment Multiplier — learn the meaning, formula, and significance of the investment multiplier in Keynesian economics. CBSE Class 12 Macroeconomics notes.

Last updated: 16 Aug 2026

Notes

Multiplier Definition

Investment Multiplier

An important contribution of Prof. J. M. Keynes. It expresses the relationship between an initial increment in investment and the resulting increase in aggregate income.

When investment increases by a certain amount, the change in income is not restricted to the initial investment but changes several times the change in investment.

Core Formula

Multiplier

k = \frac{\Delta Y}{\Delta I}

Example

If additional investment of ₹4,000 crores generates additional income of ₹16,000 crores:

k = \frac{16{,}000}{4{,}000} = 4

Income increased 4 times with a single increase in investment.

Multiplier and MPC Relationship

The concept of the multiplier is based on the fact that one person’s expenditure is another person’s income.

Higher MPC → Higher Multiplier

People spend a large proportion of increased income on consumption
This becomes income for others, who also spend a large proportion
Larger cumulative increase in income → higher multiplier

Lower MPC → Lower Multiplier

People save more, spend less of increased income
Reduces subsequent rounds of spending and income generation
Smaller multiplier value

Algebraic Derivation of k = 1/(1-MPC)

Starting from equilibrium where Y = C + I:

Change in Income

\Delta Y = \Delta C + \Delta I

Change in Consumption

\Delta C = MPC \times \Delta Y

Substituting

\Delta Y = (MPC \times \Delta Y) + \Delta I

Rearranging

\Delta I = \Delta Y(1 - MPC)

Finding the Ratio

\frac{\Delta Y}{\Delta I} = \frac{1}{1 - MPC}

Final Formula

Multiplier

k = \frac{1}{1 - MPC}

Multiplier in Terms of MPS

Known relationships

k = \frac{1}{1-MPC} \quad \text{and} \quad MPC + MPS = 1

Substituting 1 - MPC = MPS:

k = \frac{1}{MPS}

The value of the multiplier can be calculated if either MPC or MPS is known.

MPC-MPS-Multiplier Relationship

Definition

k = ΔY / ΔI

Change in income ÷ change in investment

In Terms of MPC

k = 1 / (1 − MPC)

Using marginal propensity to consume

In Terms of MPS

k = 1 / MPS

Using marginal propensity to save

Multiplier is directly related to MPC and inversely related to MPS.
MPC	MPS (1-MPC)	Multiplier (k)	Calculation
0	1	1	1/(1-0)
0.50	0.50	2	1/(1-0.50)
0.67	0.33	3	1/(1-0.67)
0.75	0.25	4	1/(1-0.75)
0.80	0.20	5	1/(1-0.80)
0.90	0.10	10	1/(1-0.90)
1	0	infinity	1/(1-1)

Maximum and Minimum Values

Maximum value of multiplier is infinity when MPC = 1. The economy consumes the entire additional income, saving nothing. Each round of spending is as large as the previous one, leading to infinite increase in income.

k = \frac{1}{1-1} = \frac{1}{0} = \infty

Minimum value of multiplier is one when MPC = 0. The economy saves the entire additional income, spending nothing on consumption. Initial increase in investment leads to equal increase in income but no further rounds of spending.

k = \frac{1}{1-0} = \frac{1}{1} = 1