Importance of Multiplier: The concept of multiplier is one of the important contributions Keynes’s to the income and employment theory. As aptly observed by Richard Goodwin, Lord Keynes did discover the multiplier; that honor goes to Mr. RF. Kahn. But he gave it the role it today by transforming it from an instrument for the analysis of road building into one for the analysis of income building. It set a fresh wind
blowing through the structure of economic thought. Its importance lies in the following:
• Investment: The multiplier theory highlights the importance of investment in income and employment theory. Since the consumption function is stable during
the short run fluctuations in income and employment are due to fluctuations in the rate of investment. A fall in investment leads to a cumulative decline in income
and employment the multiplier process and vice versa. Thus it underlines the investment and explains the process of income propagation.
• Trade Cycle: As a corollary to the above, when there are fluctuations. In the level of income and employment due to variations the rate pf investment, the multiplier
process throws a spotlight on the different phases of the trade cycle. When there is a fall in investment, income and employment decline in a cumulative manner leading recession and ultimately to depression, on the contrary, an increase in invest my deeds to reveal and, if this process continues, to a boom. Thus the
multiplier is regarded as an indispensable .tool in trade cycles.
• Saving-Investment Equality: It also helps in bringing the equality between saving and investment. If there is a divergence between saving and investment, an increase in investment leads to a rise in income via the multiplier process by more
than the increase in initial, investment. As a result of the increase in income, saving also increases and equals investment.
• Formulation of Economic Policies: The multiplier is all important tool in the hands of modern states in formulating economic policies. Thus this principle presupposes state intervention in economic affairs.
• To achieve full employment: The state decides upon the amount of investment to be injected into the economy to remove unemployment and achieve full employment. An initial increase in investment leads to the rise in income and employment by the multiplier time the increase in investment. If a single dose of
investment is insufficient to bring full employment, the state, can inject regular doses of investment for this purpose till the full employment level is reached.
• To control trade cycles: The state can control booms and depressions in a trade cycle on the basis of the multiplier effect on, income and employment. When the economy is experiencing inflationary pressures, the state can control them by a reduction in investment which leads to a cumulative decline in income and
employment via the multiplier process. On the other hand, in a deflationary situation, an increase in investment can help increase the level of income and employment through the multiplier process.
• Deficit financing: The multiplier principle highlights the importance of deficit budgeting. In a state of depression, cheap money policy of lowering the rate of interest is not helpful because the marginal efficiency of capital is so low that a low rate of interest fails to encourage private investment. In such a situation, increased public expenditure through public investment programs by creating a budget deficit helps in increasing income and employment by multiplier time the increase in investment.
• Public Investment: The above discussion reveals the importance of the multiplier in public investment policy. Public investment refers to the state expenditure on public works and other works meant to increase public welfare. It is autonomous
and is free from profit motive. It therefore, applies with greater force in overcoming inflationary and deflationary pressures in the economy, and in achieving and maintaining full employment. Private investment being induced by profit motive can help only when the public investment has created a favorable situation for the former. Moreover, economic activity cannot be left to the vagaries and uncertainties of private enterprise.