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Question

Economics Question on Investment Multiplier

If MPC > MPS, what is true about the investment multiplier (K)?

A

K > 2

B

K < 2

C

K = 1

D

K = ∞

Answer

K > 2

Explanation

Solution

The investment multiplier (K) is defined as K=11−MPC= \frac{1} {1−MP C} , where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. Since MPC and MPS sum to 1, a higher MPC implies a lower MPS, leading to a higher multiplier. If MPC ¿ MPS, the multiplier will be greater than 2, meaning that any increase in investment will have a multiplied effect on national income.