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

Household production, Assume two individuals, A and B, are considering marr...

Assume two individuals, A and B, are considering marriage, and each face the same amount of hours a week to be split between market-labor and home-labor.  Assume that A can make $2

Advantage and disadvantage of outsourcing, What are the pros and cons of ou...

What are the pros and cons of outsourcing in order to keep prices down?

Open market policy, describe how open market policy can be used to stimulat...

describe how open market policy can be used to stimulate economic activity in the country

What is gross national product, What is Gross National Product? Gross...

What is Gross National Product? Gross National Product (GNP): It measures the value of output produced through a country is citizens anywhere within the world, in a speci

Determination of gdp in the cross model, Q. Determination of GDP in the cro...

Q. Determination of GDP in the cross model? In the cross model, GDP is determined as the solution to the equation Y D (Y) = Y We may explain

What is the price elasticity of demand, Consider the following utility func...

Consider the following utility function: U = X 1 X 2 Where X 1 and X 2 are quantities consumed of two goods. You are considering the actions of a consumer that maxi

Codinal theory - consumer choice concernin utility, Ordinal Theory: A...

Ordinal Theory: A Short Note In ordinal approach, utility is measured ordinally i.e., qualitatively (not numerically or quantitatively). Alternatively, consumer can rank her

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