Question

The size of the investment multiplier depends on the Marginal Propensity to Consume (MPC) in the following way:

Options

• A lower MPC results in a larger multiplier

• A higher MPC results in a smaller multiplier

• A higher MPC results in a larger multiplier

• The multiplier is independent of the MPC

Answer 1

Since \[K=\frac{1}{1-c}\], an increase in c (MPC) reduces the denominator \[(1-c)\] and raises the multiplier. A higher MPC means more of each round's extra income is re-spent, generating larger successive rounds of demand and output.