Question

What is Investment Multiplier?

Hint:

The multiplier effect means an initial investment has a ripple effect, creating more and more income as it's spent and re-spent through the economy.

Answer 1

The investment multiplier refers to the concept that any initial increase in investment spending leads to a much larger total increase in national income (GDP). It is the ratio of the change in national income to the initial change in investment. The formula is: \[ k = \frac{\Delta Y}{\Delta I} = \frac{1}{1 - MPC} \] where \( k \) is the multiplier, \( \Delta Y \) is the change in income, \( \Delta I \) is the change in investment, and MPC is the Marginal Propensity to Consume.