Question

Briefly explain the multiplier process.

Answer 1

The working of the multiplier assumes the following process.

Change in investment causes a change in income. As a result, there is a change in consumption. Consumption expenditure of one person is an income of the other. Hence, a change in consumption leads to a change in income. This process continues till $\Delta \text{C}$ reduces to zero. MPC is the core factor in the process of income generation. Higher the MPC, greater is the conversation of income into consumption expenditure. Accordingly, greater is the generation of income. Ultimately, it is expenditure which is converted into income. Expenditure is an injection into the income generation process while saving is a leakage.