Question

If MPC > MPS, what is true about the investment multiplier (K)?

• A. K > 2
• B. K < 2
• C. K = 1
• D. K = ∞

Answer 1

The Correct Option is A

The investment multiplier (K) is defined as K\(= \frac{1} {1−MP C}\) , where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. Since MPC and MPS sum to 1, a higher MPC implies a lower MPS, leading to a higher multiplier. If MPC ¿ MPS, the multiplier will be greater than 2, meaning that any increase in investment will have a multiplied effect on national income.