(i) The classical economists believed that investment depended exclusively on rate of interest.
(ii) Investment decision depends on a number of factors.
(iii) They are as follows:
(1) Rate of interest
(2) Level of uncertainty
(3) Political environment
(4) Rate of growth of population
(5) Stock of capital goods
(6) Necessity of new products
(7) Level of income of investors
(8) Inventions and innovations
(9) Consumer demand
(10 ) Policy of the state
(11) Available of capital
(12) Liquid assets of the investors

(i) The propensity to consume refers to the portion of income spent on consumption.
MPC = \(\frac{ΔC}{ΔY}\)
(K) = \(\frac{1}{1-MPC}\)
(ii) The multiplier is the reciprocal of one minus marginal propensity to consume.
(iii) Multiplier is 1/MPS
(iv) The multiplier is therefore define as reciprocal of MPS.
(v) Multiplier is inversely related to MPS and directly with MPC.
Numerically, if MPC is 0.75, MPS is 0.25 and K is 4.
Using formula K = \(\frac{1}{1-MPC}\)
⇒\(\frac{1}{1-0.75}\) = 1/0.25 = 4
∴ Multiplier (K) = 4

C = 100 + 0.8Y;
I = 10
Y = C + I
= 100 + 0.8 Y +9p00

0.2Y = 1000
∴ Y = 1000
Here, C = 100 + 0.8y
= 100 + 1000 = 900
S = 100 = I
After I is raised by 10, now I = 110
Y = 100 + 0.8y + 110
0.2y = 210 
y = \(\frac{210}{0.2}\) = 1050
Here, C = 100 = 0.8 (1050) = 940,
S = 110 = I
(i) It implies the variables in axis-and axis are equal.
(ii) The MPC is assumed to be at 0.8. (C = 100 + 0.8y)
(iii) The aggregate demand (C + I) curve intersects 45° line at point E.
(iv) The new aggregate demand curve is
C + I = 100 + 0.8Y + 100 + 10
Y = \(\frac{210}{0.2}\)
C = 940; S = 110 = Z

Meaning of Super Multiplier
(i) In order to measure the total effect of initial investment on income, Hicks has combined the k and β mathematically and given it the name of the Super Multiplier.
(ii) The super multiplier is worked out by combining both induced consumption and induced investment. The combined name of the super multiplier and the accelerator is also called the leverage effect
Components of Super Multiplier
(i) The super multiplier is greater than simple multiplier which includes only autonomous investment and no induced investment, while super multiplier includes induced investment.
(ii) The super multiplier is greater than simple multiplier which includes only autonomous investment and no induced investment, while super multiplier includes induced investment.
The Leverage Effect
The combined effect of the multiplier and the accelerator is also called the leverage effect which may lead the economy to very high or low level of income propagation.
Symbolically,
Y= C + IA + IP
Y = Aggregate income.
C = Consumption expenditure
IA = autonomous investment
IP = induced private investment
The super – multiplier, tells us that if there is an initial increase in autonomous investment, income will increase by K times the autonomous investment.

(i) Higher interest rates reduce investment, because higher rates increase the cost of borrowing and require investment to have a higher rate of return to be profitable.
(ii) If interest rates rise from 5% to 8 %, then we get a fall in the amount of investment.
(iii) from Rs. 100 cr to Rs. 80 cr.
(iv) If interest rates are increased then it will tend to discourage investment because investment has a higher opportunity cost.

If interest rates are increased then it will tend to discourage investment because investment has a higher opportunity cost.
1. With higher rates, it is more expensive to borrow money from a bank.
2. Saving money in a bank gives a higher rate of return. Therefore, using savings to finance investment has an opportunity cost of lower interest payments.
If interest rates rise, firms will need to gain a better rate of return to justify the cost of borrowing using savings.

Since Y = C + I we can write Y = a + bY + I.
This equation can be rearranged to yield
Y - bY = a + I
Y(1 - b) = a + I
We can then solve for Y in terms of I by dividing through by (1 - b):
Y = (a + I) (1/1 - b)
Now we can see that an increase in I will increase Y by
ΔY = ΔI x (1/1 - b)
Since b D MPC, the expression becomes
ΔY = ΔI x 1/(1 - MPC)
Therefore, the multiplier is 1/1 - MPC or 1/MPS.