Investment multiplier refers to increase in national income as a multiple of a given increase in investment. Its value is determined by Mrginal Propensity to Consume
The value equals :
Multiplier `= (1)/(1-MPC) or (1)/(MPS)`
Suppose increase in investment is Rs 1,000 and MPC = 0.8. The increase in national income is in the folloiwng sequence
** Increase in investment raises income of those who supply investment goods by Rs 1,000. This is first round increase
** Since MPC = 0.8, the income earners speed Rs 800 on consumption. This raises the income of the suppliers of consumption goods by Rs 800. This is second round increase.
** In the similar way the third round increase is Rs `640 = 800 xx 8`. In this way national income goes on national income goes on increasing round after round.
** The total increase in income is Rs 5,000 which equal
`Delta Y = Delta I xx (1)/(1-MPC)`
`Delta Y = 1,000 xx (1)/(1 - 0.8) = Rs 5,000`
(Working based on table is also correct )
