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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 =
whereK = multiplier
∆ Y = change in income
∆ I = change in investment
Relation of multiplier with MPC :
K =
K =
(Dividing this equation by∆ Y we get)
K =
=
=
There is a direct relation betweenK and MPC. If MPC is high, K will also be high but if MPC is low K will also be low.
where
Relation of multiplier with MPC :
(Dividing this equation by
There is a direct relation between
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