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Therefore value of multiplier is (1/1 - b), since investment 'I' gets multiplied by this factor in producing a final effect on 'Y' or the size of effective demand. This can be explained further with the help of numerical values. Let C/Y = b = 0.8 then value of (1- b) will be (1 - 0.8) or (0.2) which is equal to 2/10 and the multiplier value will be 1 ¸ 2/10 or 1 ´ 5 = 5. This explains that if investment expenditure is initially increased by a certain amount it will produce a 5 times larger effect on the effective demand. If ’I’ increases by 100 then ’Y’ will increase by 500. This is because of the fact that the initial investment expenditure gives rise to a series of increased values of Y. The spending and income generation is a continuous process. With value of I = 100 and b = 0.8, we have subsequent rounds of income generation as follows:
I + Y1 = 100 ® C1 = 80 = Y2
Y2 = 80 ® C2 = 64 = Y3
Y3 = 64 ® C3 = 51.2 = Y4 .... etc.
The cycle will continue until ultimately the value of 'C' gets reduced to zero. But by that time the total additions made to Y = Y1 + Y2 = Y3… will equal to 500. The term 'multiplier' (1/1 - b) can be symbolically stated as (1/1 - mpc) but (1- mpc) = (mps = S/Y). Therefore multiplier value is equal to (1/1- mps). If we use the symbol 'K' to denote multiplier value then we find that multiplier value varies from K = 0 to (infinity). As the value of b tends to 1 the value of K tends to and as the value of b tends to zero the value of K tends to 1. High values of K and therefore of b are highly favorable to employment generation and can quickly relieve unemployment with a small amount of extra investment expenditure. Since the actual consumption expenditure is always positive the value of b will be more than zero (b>0) and hence value of K will exceed 1 (K > 1). Therefore there is always some multiplied effect of additional investment expenditure.
(F) ED and Income determination: If we set aside induced private investment expenditure for the time being then we can relate Effective Demand for consumption goods and the levels of income that it can generate. Since consumption expenditure is likely to be deficient, public expenditure (G) is to be added to it in the form of autonomous investment. The two together result in aggregate or effective demand and help to determine levels of income. This is also known as aggregate expenditure (AE) approach to income determination.
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