The correct option is 2 only
Explanation
The Multiplier Mechanism is a fundamental concept in Keynesian macroeconomics. It explains how an initial change in autonomous investment leads to a more than proportionate change in the final national income. The magnitude of this multiplier depends on the Marginal Propensity to Consume (MPC).
Statement 1 is Incorrect: The mechanism assumes a circular flow of income where expenditure by one entity becomes income for another. An initial increase in investment leads to an immediate increase in income. Recipients of this income then spend a portion of it on consumption (induced consumption), which generates further income for producers of goods and services.
Statement 2 is Correct: The multiplier process is continuous and does not stop after the first round. The consumption expenditure from the first round becomes income for a new set of individuals, who then spend a fraction of it in a second round. This chain of spending and income generation continues in successive rounds with diminishing values until the increments become negligible.
Statement 3 is Incorrect: The total effect on income exceeds the initial investment amount. The final increase in income is the sum of the initial investment and all subsequent rounds of consumption expenditure. Mathematically, the change in income ($\Delta Y$) is calculated as $\Delta Y = k \times \Delta I$, where $k$ is the investment multiplier and is generally greater than 1.
Key Takeaway: The value of the investment multiplier is determined by the formula $k = \frac{1}{1 - MPC}$ or $k = \frac{1}{MPS}$. A higher Marginal Propensity to Consume (MPC) results in a larger multiplier effect.