Question

How is the investment multiplier related to marginal propensity to consume?

How is the multiplier related to marginal propensity to consume?

Briefly explain how investment multiplier is related to Marginal Propensity to Consume (MPC).

Answer 1

The investment multiplier is given by the formula

K = `1/(1 - MPC)`

= `1/(1 - c)`

where C is the marginal propensity to consume (MPC).

This means the multiplier’s value depends directly on the MPC. The greater the MPC, the higher the multiplier, and the lower the MPC, the smaller the multiplier.