Question

"When MPC is equal to MPS, increase in income will be two times the increase in investment'. Comment.

Answer 1

Investment multiplier refers to the number of times by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between the change in income and change in investment and it is denoted as 'k'.

K= 1/ MPS

So if MPS=MPC then ,

MPC + MPS =1

=> 2 MPS= 1

=> MPS= 1/2

=> MPS= 0.5

K= 1/ MPS= 2 times.

Hence, the increase in income will be twice the increase in investment.