Define the term investment multiplier and state its relevance. 

It is the number of times a given change in investment (ΔI) will multiply itself to generate an additional increase in income (ΔY) and employment in an open economy.

Or

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment

i.e. investment multiplier = ΔY/ΔI

= 1/(1 – MPC)

= 1/MPS

High MPC leads to a higher the investment multiplier or spending on other parts of the economy.  This stimulates wider economic growth from the initial investment.

The reason the businesses are associated with a higher investment multiple is that their MPC is higher than that of their workers. In other words, they spend a greater percentage of their income on other parts of the economy, thereby spreading the economic stimulus caused by the initial investment more widely.

Relevance of investment multipliers

• Multiplier helps in estimating the increase in income as a result of increase in investment
• Multiplier theory takes investment as the important factor of the economy. The proportionate increase in the level of income and employment in the economy depends up on the multiplier. That is increase in income and employment is due to increase in investment.
• Analysis of trade cycle: It is easier to analyses trade cycle on the basis of multiplier. Multiplier helps in estimating the increase in income as a result of increase in investment. So, multiplier will be of great importance in formulating progressive policies to bring the effects in the economy to right speed.
• Formulation of economic policy: The main objective of every economic policy is to create the situation of full employment in the economic. Therefore policy makers will formulate their country’s economic policy using the multiplier. This will help in creating the situation of full employment.
• Public investment: Public investment is of great importance specially in the situation of depression and unemployment, because this does not stress much on profits. Multiplier indicates the importance of public investment in increasing the level of employment.
• Equality between saving and investment: The equality between saving and investment can be brought about with the help of multiplier. Increase in investment increases the income. Increase in income will bring about equality in saving and investment.