Question

If the marginal propensity to consume is equal to one then what would be the value of multiplier?

• A. Zero
• B. 1
• C. 1000
• D. Infinite

Hint:

When the marginal propensity to consume (MPC) is 1, the multiplier becomes infinite because every additional dollar of income is spent, leading to continuous growth in economic output.

Answer 1

The Correct Option is D

Step 1: Understanding the marginal propensity to consume (MPC).
The marginal propensity to consume (MPC) is the proportion of additional income that a consumer spends on goods and services. The multiplier is the factor by which a change in autonomous spending will affect total economic output. The formula for the multiplier is given by: \[ \text{Multiplier} = \frac{1}{1 - \text{MPC}}. \]
Step 2: Analyzing the options.
(A) Zero: Incorrect. If MPC were zero, the multiplier would be 1 because there would be no change in consumption with an increase in income.
(B) 1: Incorrect. A multiplier value of 1 occurs if MPC is 0. If MPC were 1, the multiplier would be infinite.
(C) 1000: Incorrect. The multiplier does not have a fixed value like 1000 unless other specific values for MPC are given.
(D) Infinite: Correct. If the MPC is 1, meaning all additional income is consumed, the formula for the multiplier results in an infinite value, as the economy's output would keep increasing indefinitely.

Step 3: Conclusion.
If the marginal propensity to consume is equal to one, the value of the multiplier would be Infinite. Thus, the correct answer is (D).