Planned expenditure effect

According to the Keynesian framework, Y=C I G (X-M), where I stands for investment. Therefore, reduction in planned investment expenditure by Mitsubishi(a car industries) would cause contraction on the Y, national income and the economy shrinks. The reason why the fall in state economic activity might be excepted to be greater than the initial fall in investment spending is that there is a chain reduction on all investment and consumption in the economy. For example, fall in investment by Mitsubishi would reduce investment by the tyres and accessories/parts on cars of other companies, as they are complementary goods. As a consequence, those companies would hire less labour to work, thus their income would be smaller. Further. the drop of consumption from those labour would drag the revenue of the supermarkets or restaurants. These chain of contraction on income and consumption is known as NEGATIVE MULTIPLIER EFFECT on national income. The contraction in national income can be calculated by a simple formula: Fall in national income = fall in investment / ( 1-MPC). MPC: marginal propensity to consume, which is less than 1.