CBSE 2018 Class 12 Economics Re-Exam

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Question : 5
Total: 15
Define investment multiplier. How is it related to marginal propensity to consume?
Solution:  
The number of times by which income increases as a result of increase in investment is called investment multiplier. Investment multiplier shows a relationship between initial increment in investment and the resulting increment in national income.
K=
Y
I

where K= multiplier
Y= change in income
I= change in investment
Relation of multiplier with MPC :
K=
Y
I

K=
Y
C

(Dividing this equation by Y we get)
K=
Y
YC

=
Y
Y
Y
Y
C
Y
=
1
1MPC

There is a direct relation between K and MPC. If MPC is high, K will also be high but if MPC is low K will also be low.
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