Question

If the marginal propensity to save (s) is 0.25, the investment multiplier equals:

Options

• 0.25

• 4

• 25

• 1.25

Answer 1

\[K=\frac{1}{s}=\frac{1}{0.25}=4\]. This is consistent with \[c = 1 - s = 0.75\], giving \[K=\frac{1}{1-0.75}=4\]. A higher saving propensity out of extra income weakens the multiplier.