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Multiplier plays a significant role in Keynesian Macro Economics.(a) Examine the relationship between multiplier and MPC(b) If MPC = 0.8, calculate multiplier. |
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Answer» (a) The value of multiplier is determined by marginal propensity to consume. Higher the MPC, greater the size of multiplier lower the MPC, smaller the size of multiplier. When income of consumer rises they spend more the value of increase in income ie. multiplier depends on ’MPC, greater the value of multiplier depends on greater size of MPC. Thus there is direct relation between multiplier and MPC. The relation can be expressed in terms of an equation as under K = \(\frac{ΔY}{ΔI}\) We know ΔY = ΔC + ΔI ΔI = ΔY + ΔC Putting the value of in equation we get, K = \(\frac{ΔY}{ΔY - ΔC}\) = \(\frac{1}{1-MPC}\) Thus it is clear from the above equation that the value of MPC and multiplier are positively related (b) MPC = 0.8 Multiplier (k) = \(\frac{1}{1-MPC}\) = \(\frac{1}{1-0.8}\) = \(\frac{1}{0.2}\) = 5 |
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