Question

If MPC = 1, then what will be the value of multiplier?

• A. Less than 0
• B. Between 0 and 1
• C. 0
• D. Infinity

Hint:

When MPC is 1, every increase in income is spent, leading to an infinite multiplier effect.

Answer 1

The Correct Option is D

Step 1: Understanding MPC and Multiplier:
The Marginal Propensity to Consume (MPC) is the proportion of an additional income that is spent on consumption. The multiplier is a measure of the change in national income resulting from an initial change in spending.
The formula for the multiplier is:
\[ \text{Multiplier} = \frac{1}{1 - \text{MPC}} \] Step 2: Applying MPC = 1:
If MPC = 1, the formula becomes:
\[ \text{Multiplier} = \frac{1}{1 - 1} = \frac{1}{0} \] Since dividing by zero results in infinity, the value of the multiplier when MPC = 1 is infinite.
Step 3: Conclusion:
The multiplier value is infinite when MPC is 1, making option (D) the correct answer.