Question

Define multiplier. What is the relation between marginal propensity to consume and multiplier? Calculate the marginal propensity to consume if the value of multiplier is $4$.

Answer 1

Multiplier is the ratio between increase in income and increase in investment. It explains how many times is income increased by increasing the investment.

Multiplier (k) = Change in income/ change in investment

There exists a direct relationship between MPC and the value of multiplier. Higher the MPC, more will be the value of multiplier, and vice-versa. One person’s expenditure is another person’s income. So increase in consumption results into increase in income. People spend a part of this increased income on consumption which depends on the value of MPC.

K= 1 / (1-MPC)

Therefore, if K= 4, MPC= 3/4 or 0.75