Question

Calculate the value of multiplier, if MPC is: (i) 0.60; (ii) 0.50

Answer 1

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 and it is denoted as 'k'.

K= 1/ (1- MPC)

(i) When MPC= 0.60

k= 1/ ( 1-0.60) = 1/ 0.40 = 2.5 times

(ii) When MPC= 0.50

k = 1/ ( 1- 0.50 ) = 1/ 0.50 = 2 times