Investment Multiplier refers to increase in national income as a multiple of a given increase in Investment. Its value is determined by MPC. It is denoted by 'K' where K = Δy/ΔI.where, ∆y = additional income generated

∆I = additional Investment

Multiplier = 1/1-MPC or 1/MP

Where MPC= Marginal Propensity to Consume MPS = Marginal Propensity to save

Suppose increase in investment is Rs. 1000 and MPC = 0.8. The increase in national income is in the following sequence:

(i) Increase in investment raises income of those who supply investment goods by Rs.1000. This is the first round increase.

(ii) Since MPC = 0.8, the income earners spend Rs. 800 on consumption. This raises the income of the suppliers of consumption goods by Rs.800. This is second round increase.

(iii) In the similar way, the third round increase is Rs.640 = 800 × 0.8. In this way, national income goes on increasing round after round.

(iv) The total increase in income is Rs. 5000 which equals:

∆Y = ∆I X 1/1-MPC

∆Y  = 1000 X1/1- 0.8 = Rs.5000