The
multiplier formula can be derived by using the simple equilibrium condition for
the two sector model i.e
Y = C + I
When there is an increase in investment by (∆I), it will lead to increase in
income (∆Y) and this induces
increase in consumption (∆C) i.e
∆Y = ∆C + ∆I
Since,
change in total consumption (∆C) equals change in income multiplied by MPC (marginal
propensity to consume, “c”)
∆Y = c∆Y + ∆I
∆Y - c∆Y = ∆I
∆Y(1-c) = ∆I
∆Y = ( 1 /
1-c) ∆I
∆Y/ ∆I = 1 / 1-c
