Question

If the ratio of marginal propensity to consume and marginal propensity to save is 8:2, the value of investment multiplier will be

• A. 4
• B. 5
• C. 0
• D. 1

Answer 1

The correct option is B

5

Let us assume that MPC = 4x and MPS = 1x, as ratio of MPC and MPS = 4 : 1

We know,

MPC + MPS = 1 $\Rightarrow$ 4x + 1x = 1

$\Rightarrow$ 5x = 1 $\Rightarrow$ $x=\frac{1}{5}=0.2$ (implying MPS = 0.2)

Accordingly, $MPC=4\times 0.2=\mathrm{0.8.}$

In such a case,

$M=\frac{1}{1-MPC}=\frac{1}{1-0.8}=\frac{1}{0.2}=5$