Multiple choice

If the value of marginal propensity to consume is 0·75, the value of investment multiplier would be

  1. 4

  2. 3

  3. 2

  4. 1
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Explanation

The investment multiplier (k) is calculated as k = 1 / (1 - MPC) or alternatively k = 1 / MPS, where MPC is marginal propensity to consume and MPS is marginal propensity to save. Given MPC = 0.75, we have MPS = 1 - 0.75 = 0.25. Therefore, k = 1 / 0.25 = 4. The multiplier shows that an initial investment of Rs. 1 will ultimately increase national income by Rs. 4 through the multiplier process of successive rounds of spending.

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