Question

If marginal propensity to save is 0.1, calculate value of multiplier.

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'.

If MPS= 0.1 , then MPC =1- MPS = 1- 0.1 = 0.9. So,

Multiplier(k) = 1/ (1-MPC)

= 1/(1-0.9)

= 1/0.1

= 10