Question

How is the multiplier related to the marginal propensity to save?

How is MPS related to the investment multiplier?

Answer 1

The multiplier is the reciprocal of the marginal propensity to save. Thus, there is an inverse relationship between K and MPS. The larger the value of MPS, the lower the size of the multiplier. On the other hand, if the value of MPS is lower, the value of the multiplier will be higher. It should be noted that just as an increase in investment leads to a multiple increase in income, a decrease in investment will lead to a multiple decrease in income. In other words, the multiplier output in the reverse direction as well. Thus, the multiplier works both ways.

MPS = 1 − MPC

Answer 2

The multiplier is inversely related to the marginal propensity to save (MPS). A higher MPS means people save more and spend less, reducing the multiplier effect. The relationship is given by the formula:

K = `1/"MPS"`

Thus, as MPS increases, the multiplier decreases.

Since MPS = 1 − MPC

K = `1/(1 - MPC)`