Question

According to the mechanism of investment multiplier, the amount of increase in consumption _____________ in each progressive round.

• A. increases
• B. diminishes
• C. remains constant
• D. none of the above

Answer 1

Answer: (B)

diminishes

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment. According to this mechanism, the amount of increase in consumption diminishes in each progressive round as a part of the initial income is always saved which decreases the income in the successive rounds and so the increase in consumption also diminishes.