Question

If the Marginal Propensity to Consume (MPC) is 0.8, what is the value of the investment multiplier (K)?

Options

• 4

• 0.8

• 5

• 8

Answer 1

5

Explanation:

The multiplier formula is \[K=\frac{1}{1-MPC}\]. Substituting MPC = 0.8, we get K = 1 / (1 − 0.8) = 1 / 0.2 = 5. This means every ₹1 of new investment generates ₹5 of additional income in the economy.