Question

In a hypothetical economy, if entire additional income is consumed, the value of investment multiplier would be ____ . (Fill up the blank with the correct alternative.)

• A. One (1)
• B. Zero (0)
• C. Between zero (0) and one (1)
• D. Infinity

Hint:

If the entire income is consumed (MPC = 1), the investment multiplier becomes infinite, indicating a fully stimulated economy.

Answer 1

The Correct Option is D

- The investment multiplier is calculated as \(\frac{1}{1 - {MPC}}\), where MPC is the marginal propensity to consume. 
- If the entire income is consumed, the MPC = 1, leading to an infinite multiplier because \(\frac{1}{1 - 1} = \infty\). 
- Hence, the value of the investment multiplier in this case is infinity. 
Conclusion: When all additional income is consumed, the investment multiplier becomes infinite because every increase in income leads to an equivalent increase in consumption, stimulating constant economic growth.