Importance of Multiplier

The concept of multiplier is a major contribution of Keynes to the theory of income and employment. It helps to explain fluctuations in business activates and facilitates formulation of appropriate policies.

(1) Trade Cycle: Multiplier explains the occurrence of business fluctuations resulting from increase and decreases in investment. An increase in investment causes revival, and a decrease in it, contraction in business activities.

(2) Acceleration of Economic Growth: The rate of economic growth is measured in terms of increase in GDP. Multiplier helps the state to decide the additional investment expenditure that should be undertaken to achieve desired increase in GDP.

(3) Deficit Financing: During depression when a low rate of interest fails to revive business activities the government can resort to deficit financing. The resources generated through deficit budget can help generate additional employment and income in the economy.

(4) Public expenditure: The state can play an important role in promoting business activities through additional spending, particularly when the private sector suffers from pessimism and not willing to undertake investment.

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