Question

Investment multiplier and marginal propensity to consume share a/an ____________ relationship.

• A. direct
• B. inverse
• C. irrational
• D. linear

Answer 1

The correct option is A direct

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.

Marginal Propensity to consume refers to the percentage change in consumption for every one rupee of change in the income. It is the ratio between the change in income and corresponding change in consumption.

Multiplier(k) => Change in income / change in investment = 1/ {1-MPC(c)} where c is the marginal propensity to consume.

Therefore, there is a direct relationship between investment multiplier and marginal propensity to consume which means if marginal propensity to consume increases, investment multiplier also increases and vice-versa.