Page 90 - Macroeconomics. book docx_Neat

The investment multiplier explains how an initial increase in investment leads to a larger

increase in national income.

In simple words:

One pound of investment creates more than one pound of income.

This happens because investment creates income, and income creates consumption,

and consumption creates more income.

Why Does the Multiplier Exist?

When investment increases:

Firms hire workers.

Workers receive income.

Workers spend part of their income.

Spending becomes income for others.

The process continues in rounds.

So, income keeps increasing until savings stop the process.

The Multiplier Process

Suppose:

Investment increases by 100 MPC = 0.8

Round 1:

Investment ↑ 100 → Income ↑ 100

Round 2:
Consumption = 0.8 × 100 = 80

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