Question

If the MPC is 0.9, the investment multiplier equals:

Options

• 10

• 1.11

• 9

• 0.9

Answer 1

\[K=\frac{1}{1-c}=\frac{1}{1-0.9}=\frac{1}{0.1}=10\]. A very high MPC means nearly all extra income is re-spent each round, so the multiplier is very large. Equivalently, \[s = 1 - 0.9 = 0.1\] and \[K=\frac{1}{s}=10\].