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

Product development project, What is the primary difference between a resea...

What is the primary difference between a research project and a product development project?

#.., what are the purposes of taxation

what are the purposes of taxation

What is an oligopoly?, Oligopoly is a marketplace where the deliver is cont...

Oligopoly is a marketplace where the deliver is controlled by a small group of companies. In this condition, the actions of single company will have a material effect on the whole

Determine the categories of finished goods, Determine the categories of fin...

Determine the categories of finished goods Finished goods in the goods market are divided into 4 categories: private consumption going to private sector, public consumption for

Illustrate the overview and importance of macroeconomics, Illustrate the ov...

Illustrate the overview and importance of macroeconomics? After familiar with this illustration, able to know: a. An overview of macroeconomics is the study about the econom

Show the components of gdp, Q. Show the components of GDP? The circular...

Q. Show the components of GDP? The circular flow - simple version We have defined GDP, gross domestic product, as the market value of all finished service and goods produced

Liquidity preference theory, Explain clearly the liquidity preference theo...

Explain clearly the liquidity preference theory of interest propounded by j.m.keynes

Describe nominal and real interest rates, Q. Describe Nominal and real inte...

Q. Describe Nominal and real interest rates? To distinguish real interest rate from the ‘normal' interest rate, latter is termed as the nominal interest rate. Nominal interest

Adjustment to equilibrium, reason why the change in equilibrium of output i...

reason why the change in equilibrium of output is greater than the change in initial invest ..

Quality of health care, Explain how changes in the quality of health care w...

Explain how changes in the quality of health care will influence the demand for care.

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