Question

Which of the following values of MPC yields the largest investment multiplier?

Options

• 0.8

• 0.4

• 0.5

• 0.6

Answer 1

\[K=\frac{1}{1-c}\]: for c = 0.8, K = 5; for c = 0.6, K = 2.5; for c = 0.5, K = 2; for c = 0.4, K ≈ 1.67. Since the multiplier rises with the MPC, c = 0.8 gives the largest multiplier among the options.