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What is the range of values of investment multiplier ? Clarify the relation of investment multiplier with marginal propensity to consume (MPC) and with marginal propensity to save (MPS). |
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Answer» The value of multiplier depends on marginal propensity to consume (MPC). Thus, Multiplier = \(\frac{1}{1-MPC}\) Accordingly, the range of investment multiplier is one to infinity. Minimum value of multiplier is one because minimum value of MPC Can be zero. Maximum value of multiplier is infinity because maximum value of MPC can be one. Investment multiplier and marginal propensity to consume are positively related. If marginal propensity to consume rises, the value of multiplier also rises. Suppose MPC = \(\frac{3}{4}\)(0.75), the multiplier will be \(\frac{1}{1-(\frac{3}{4})}\) = 4 If MPC rises to (0.80), the multiplier will be \(\frac{1}{1-(\frac{4}{5})}\) = 5 Investment multiplier and marginal propensity to save are negatively related. If marginal propensity to save rises, investment multiplier falls. Suppose MPS = the multiplier will be \(\frac{1}{\frac{1}{4}}\) = 4. If MPS rises to \(\frac{1}{3}\), the multiplier will be \(\frac{1}{\frac{1}{3}}\) = 3. |
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