Leakages in multiplier, Macroeconomics

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. 

Posted Date: 7/8/2013 10:43:29 PM | Location : United States







Related Discussions:- Leakages in multiplier, Assignment Help, Ask Question on Leakages in multiplier, Get Answer, Expert's Help, Leakages in multiplier Discussions

Write discussion on Leakages in multiplier
Your posts are moderated
Related Questions
Subsidy programs are likely to have a number of secondary effects in addition to the direct effect on dairy prices. What impact do you suppose farm subsidies are likely to have on

What are the 4 scarce, factors of production and what is a description of each of them. What are the costs to these resources?

unplanned changes in inventory are counted as inventory spending by firms.say true or false and justify

INTERDEPENDENCE OF MACROECONOMICS AND MICROECONOMICS In microeconomics, the underlying assumption is that the total output, total employment and total spending are given. It th

Half the members of a fishing tribe catch four fish per day and half catch 10 fish per day. A group of 10 members could build a boat for another tribe in one day and receive a paym

If real GDP was $13.1 trillion in 2013 and $13.3 in 2014, what is the growth rate? (b) How many years would it take for GDP (gross domestic product) to double (using your answer fr

An online stock trading company makes part of their revenue from clients when the clients trade stocks therefore, it is important to the company to have an good idea of how many tr

Q. Explain about Phillips curve ? The Phillips curve  According to traditional Phillips curve, there is a negative and stable relationship between unemployment andwage in

Marginal propensity to SPEND refers to: a. a nation's additional spending on a good per an additional unit of expenditure. b. a nation's additional consumption based on a unit incr

What is the formula for consumer price index?