Question

Investment multiplier can be expressed as:

• A. $K=\frac{MPC}{MPS}$
• B. $K=\frac{1}{MPS}$
• C. $K=\frac{APC}{MPS}$
• D. $K=\frac{APS}{MPS}$

Answer 1

The correct option is B $K=\frac{1}{MPS}$

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 save refers to the percentage change in savings for every one rupee of change in the income. It is the ratio between the change in income and its corresponding change in savings.

Multiplier(k) => Change in income / change in investment = 1/ MPS(s) where s is the marginal propensity to save.

Therefore, there is an inverse relationship between investment multiplier and marginal propensity to save which means if marginal propensity to save increases, investment multiplier decreases and vice-versa.