Question

If \(MPC = 0.5\), what will be the value of the Investment Multiplier (\(K\))?

• A. 1
• B. 2
• C. 4
• D. 5

Hint:

Since $MPS = 1 - MPC$, the multiplier formula can also be written as $K = \frac{1}{MPS}$. Higher the MPC, higher the Multiplier, and vice versa.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The Investment Multiplier (\(K\)) shows by how many times the national income increases for every unit increase in investment. It is directly related to the MPC.

Step 2: Detailed Explanation:
The formula for the Investment Multiplier is:
\[ K = \frac{1}{1 - MPC} \]
Substituting the given value:
\[ K = \frac{1}{1 - 0.5} = \frac{1}{0.5} = 2 \]

Step 3: Final Answer:
The value of the Investment Multiplier \(K = \mathbf{2}\).