Marginal propensity to save and investment multiplier share a/an __________ relationship.

direct

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inverse

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irrational

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linear

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Solution

The correct option is D inverse
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.

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Similar questions

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.

In an economy income increases by 10,000 as a result of a rise in investment expenditure by 1,000. Calculate

(i) Investment multiplier.

(ii) Marginal propensity to consume.

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