Question

(a) Complete the following table.

$\begin{array}{ccc}\text{MPC}& \text{MPS}& \text{Multiplier}\\ 0& -& -\\ -& 0.5& -\\ -& -& 4\end{array}$

(b) Why rise in MPC leads to increase in Multiplier?

Answer 1

(a)

$\begin{array}{ccc}\text{MPC}& \text{MPS}& \text{Multiplier}\\ 0& 1& 1\\ 0.5& 0.5& 2\\ 0.75& 0.25& 4\end{array}$

MPC + MPS = 1

Multiplier = $\frac{1}{1-MPC}=\frac{1}{MPS}$

(b) MPC and multiplier are directly related to each other. As the value of MPC rises, it means that now more money is spent on consumption rather than savings. Increase in consumption will become the income for others in an economy or one man's expense is other man's income.

So, income levels will further increase. As the level of income rises at each level with the initial investment, the value of multiplier also rises.