Leakages in multiplier, Macroeconomics

Assignment Help:

In real life, the operation of simple multiplier is affected by many leakages. Leakages in the multiplier arise out of the following reasons:

(1) Saving: If all the income is spent on consumption, then every increase in investment will raise the level of income. But, if a large proportion of the income is kept as saving, it will certainly have different effect on the intensity of multiplier.

(2) Debt Cancellation: If the people use a large proportion of their income in debt repayment, they will have smaller amount of income left for consumption. As a result, marginal propensity to consume falls and the value of multiplier also goes down.

(3) Imports: If the imports of a country exceed its exports a large portion of the national income will go to foreigners. Consequently, the multiplier effect of this expenditure is transmitted abroad. In such a situation, any increase in the investment will not increase the level of income in the economy.

(4) Price Inflation: When the economic reaches the full employment level or very close to it, every increase in investment will bring about a simultaneous increase in the price level. A large portion of incremental income will be spent in buying costly things; therefore, the intensity of multiplier becomes weak.

(5) Liquidity preference: People keep a part of their money income in liquid form. Liquidity preference reduces the present level of consumption of the community; as a result, the multiplier loses its strength. 


Related Discussions:- Leakages in multiplier

Pigou effect, The Pigou effect: A) suggests that as prices fall and real...

The Pigou effect: A) suggests that as prices fall and real money balances rise, consumers should feel less wealthy and spend less. B) suggests that as prices fall and real mo

BANK, HOW CAN CENTRAL BANK INFLUENCE THE STABILITY OF THE BANKING SYSTEM?

HOW CAN CENTRAL BANK INFLUENCE THE STABILITY OF THE BANKING SYSTEM?

Farmer grows wheat and sells, A farmer grows wheat and sells it to a miller...

A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bre

Describe about monetary policy, Q. Describe about Monetary policy? By m...

Q. Describe about Monetary policy? By monetary policy we mean policy directed at controlling the money supply and interest rates. In most nations, central bank is responsible f

Economic laws and characteristics of economic laws, what is economic laws a...

what is economic laws ans characteristics of economic laws?

Subsequent withdrawals increase, What is the amount of five equal annual de...

What is the amount of five equal annual deposits that can provide five annual withdrawals, where a first withdrawal of $1500 is made at the end of year six and subsequent withdrawa

Illustrate budget constraint and optimal bundle, Danny is an investment ban...

Danny is an investment banker and has income I = 300. When prices are px = 10 and py = 20, Danny consumes the bundle (x; y) = (6; 12). 1. Illustrate Danny's budget constraint

Positive and normative economics, POSITIVE AND NORMATIVE ECONOMICS E...

POSITIVE AND NORMATIVE ECONOMICS Economics as a social science adopts an analytical approach to the study of changes in economic variables on the actions of human beings. Th

Describe how exchange rate is expressed, Describe how exchange rate is expr...

Describe how exchange rate is expressed in some nation In some nations, exchange rate is expressed using home currency as base currency. In UK for instance, Danish exchange rat

Diseconomies of scale, What are the four managerial factors that lead to di...

What are the four managerial factors that lead to diseconomies of scale

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd