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Question
'Investment multiplier and Marginal Propensity to Consume are directly related to each other'. Explain with the help of numerical example.
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Solution
Investment multiplier and MPC are directly related to each other. It can be as follows:
K = `1/(1 - "MPC")`
If, MPC = 0.4
then, K = `1/(1 - 0.4)`
= `1/0.6`
If, MPC = 0.6
then, K = `1/(1 - 0.6)`
K = `1/0.4`
Hence, Both are directly related with the increase in MPC, investment multiplier will increases.
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