Question

What will be the investment multiplier if MPC is 0.2?

• A. 200
• B. 5
• C. 2
• D. 1.25

Hint:

The multiplier formula is \(k = \frac{1}{1 - MPC}\). Just plug in the MPC value and solve.

Answer 1

The Correct Option is D

The investment multiplier (k) shows how much total income (GDP) changes for a given change in investment. Its formula is derived from the Marginal Propensity to Consume (MPC). There are two common formulas for the multiplier: \[ k = \frac{1}{1 - MPC} \quad \text{or} \quad k = \frac{1}{MPS} \] Given MPC = 0.2, we can first find the Marginal Propensity to Save (MPS): \[ MPS = 1 - MPC = 1 - 0.2 = 0.8 \] Now, we can calculate the multiplier: \[ k = \frac{1}{MPS} = \frac{1}{0.8} = 1.25 \]