Increase in investment in an economy generates a multiplier effect on its national income. The extent of multiplier effect (and therefore, the extent of the total increase in income) depends on the marginal propensity to consume (MPC). Higher the MPC, greater would be the multiplier effect and vice-versa.

Working of Multiplier: An additional investment of Rs 100 crores (ΔI) is made to construct a flyover. This extra investment will generate an extra income of Rs 100 crores in the first round. But this is not the end of the story.

If MPC is assumed to be 0.90, then recipients of this additional income will spend 90% of RS 100 crores, i.e., Rs 90 crores as consumption expenditure and the remaining amount will be saved. It will increase the income by Rs 90 crores in the second round.

In the next round, 90% of the additional income of Rs 90 crores, i. e., Rs 81 crores will be spent on consumption and the remaining amount will be saved. This multiplier process will go on and the consumption expenditure in every round will be 0.90 times of the additional income received from the previous round.