Question

Suppose the saving curve of an economy makes an intercept at a negative value of ₹ 50 crores. In the economy, 20% of an increase in income is saved.

In the light of the above context, identify the value of investment multiplier (K).

Options

• 2

• 5

• 10

• ∞ (infinite)

Answer 1

5

Explanation:

The investment multiplier (K) is given by K = `1/("MPS")` (Marginal Propensity to Save). 

Since MPS = 20% or 0.2, we get:

K = `1/0.2`

∴ K = 5