Question

State the relation between Multiplier and Marginal propensity to Consume.

Hint:

Remember that the multiplier is inversely related to the Marginal Propensity to Save (MPS), as \(k = \frac{1}{MPS}\).

Answer 1

Step 1: Understanding the Concept:
The investment multiplier shows how many times the national income increases as a result of an initial increase in investment.
Step 2: Key Formula or Approach:
The mathematical relationship is given by:
\[ k = \frac{1}{1 - MPC} \]
Step 3: Detailed Explanation:
- If MPC increases, the value of the multiplier (\(k\)) also increases.
- For example, if \(MPC = 0.5\), then \(k = \frac{1}{1-0.5} = 2\).
- If \(MPC = 0.8\), then \(k = \frac{1}{1-0.8} = 5\).
This happens because higher consumption leads to higher income for others in a circular flow, multiplying the initial investment effect.
Step 4: Final Answer:
The value of the multiplier is directly proportional to the MPC; the higher the propensity to consume, the higher the multiplier.