Question

Giving reasons state whether the following statements are true or false:

(a) When marginal propensity to consume is zero, the value of investment multiplier will be 1.

(b) If the ratio of marginal propensity to consume and marginal propensity to save is 4: 1, the value of investment multiplier will be 4.

(c) AD curve starts from X-axis.

Answer 1

(a) When marginal propensity to consume is zero, the value of investment multiplier will be 1. This statement is true because

$K=\frac{1}{1-MPC}$

$=\frac{1}{1-0}=1$

(b) If the ratio of marginal propensity to consume and marginal propensity to save is 4 : 1, the value of investment multiplier will be 4.
This statement is false because

MPC : MPS = 4 : 1

$MPC=\frac{4}{5}=0.8or\text{MPS}=0.2$

$K=\frac{1}{1-MPC}or\frac{1}{1-0.8}=5$

(c) This statement is false because AD includes consumption and investment, and consumption cannot be zero even at zero level of income. So, AD curve starts from Y-axis and not X- axis.