Question

If the value of Investment Multiplier (K) is 5, the relevant saving function would be ___________.

• A. $S = -60 + 0.25Y$
• B. $S = -60 + 0.75Y$
• C. $S = -60 + 0.20Y$
• D. $S = -60 + 0.60Y$

Hint:

Always remember: Investment Multiplier $K = \frac{1}{MPS}$. So, if you know $K$, you can easily find MPS.

Answer 1

The Correct Option is C

\[ \text{The Investment Multiplier (K) is given by}\quad K = \frac{1}{1 - MPC} \] \[\text{So, } MPC = 1 - \frac{1}{K} = 1 - \frac{1}{5} = 0.8.\] \[\text{Since } MPC + MPS = 1, \text{we get } MPS = 1 - 0.8 = 0.2.\] \[\text{The savings function is: } S = -C + MPS \times Y.\] \text{The options provide the constant term as } -60.
\text{So, the relevant saving function is: } S = -60 + 0.20Y.