Question

Multiplier can be expressed through which of the following formulae?

• A. \( K = \frac{\Delta S}{\Delta I} \)
• B. \( K = \frac{\Delta Y}{\Delta I} \)
• C. \( K = I - S \)
• D. None of these

Hint:

The fundamental definition of the multiplier (K) is the ratio of the resulting change in income (\(\Delta Y\)) to the initial change in investment (\(\Delta I\)).

Answer 1

The Correct Option is B

The investment multiplier (K) is defined as the ratio of the change in national income (\(\Delta Y\)) to the change in investment (\(\Delta I\)) that brought it about. The formula is: \[ K = \frac{\text{Change in Income}}{\text{Change in Investment}} = \frac{\Delta Y}{\Delta I} \] This formula directly measures how many times the national income increases for a given increase in investment. Other related formulas for the multiplier are \( K = \frac{1}{1-MPC} \) and \( K = \frac{1}{MPS} \), where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. Option (B) is the definitional formula.