Tnvestment multiplier and Marginal ...

CBSE 2022 Class 12 Economics Delhi Set 1 (Term 2)

Question : 15 of 21

Marks: +1, -0

Tnvestment multiplier and Marginal Propensity to Consume are directly related to each other'. Explain with the help of numerical example.

Solution:

Investment multiplier and MPC are directly related to each other. It can be as follows:

K\;=\frac{1}{1-\mathrm{MPC}}

\mathrm{MPC}\;=0.4

then

K\;=\frac{1}{1-0.4}\;=\frac{1}{0.6}

\mathrm{MPC}\;=0.6

then

K\;=\frac{1}{1-0.6}\;=\frac{1}{0.4}

\therefore

Both are directly related with the increase in MPC, investment multiplier will increases.

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