The working of investment multiplier is based on the fact that one person's expenditure is another person's income. Now explaining it with the help of an example and schedule. Suppose that it is given that Al - 100 crore and MPC = 0.8. We know that Investment is undertaken to generate income and the total increase in income is in several rounds.

• First round: It is known that investment means expenditure on producer goods. So if we start with an investment of ₹ 100 crores, it will raise the income of the producers of these goods by ₹ 100 crores.
• Second round: Given that the MPC = 0.8, people spend 80% of increase in income i.e., ₹ 80 crores (100 × 0.8) on consumption. This will raise the income of the producers of consumer goods by ₹ 80 crores. This is the second round of increase and it equals 80% of the first round increase. So, the total increase in income at the end of second round is 100 + 80 = 180 Crores.
• Third round: Given MPC as 0.8, people will spend 80% of 80 crores, i.e., 64 crores on consumption. This means there will be an increase in the income of the producers of consumer goods by 64 crores. This is the third round of increase and it equals 80% of the second round increase. So the total increase in income will be 100 + 80 + 64 = ₹ 244 Crores at the end of third round. In this, the national income will go on increasing round after round, but the increase in absolute terms will go on becoming smaller with every successive round. This increase in income will stop rising when initial increase in Investment (AI) becomes equal to increase in savings (AS), i.e., ₹ 100 Crores = ₹ 100 Crores.