In a hypothetical economy, if entire additional income is consumed, the value of investment multiplier would be ____ . (Fill up the blank with the correct alternative.)
In a hypothetical economy, if entire additional income is consumed, the value of investment multiplier would be ____ . (Fill up the blank with the correct alternative.)
Show Hint
- One (1)
- Zero (0)
- Between zero (0) and one (1)
- Infinity
The Correct Option is D
Solution and Explanation
- The investment multiplier is calculated as \(\frac{1}{1 - {MPC}}\), where MPC is the marginal propensity to consume.
- If the entire income is consumed, the MPC = 1, leading to an infinite multiplier because \(\frac{1}{1 - 1} = \infty\).
- Hence, the value of the investment multiplier in this case is infinity.
Conclusion: When all additional income is consumed, the investment multiplier becomes infinite because every increase in income leads to an equivalent increase in consumption, stimulating constant economic growth.
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Statement 2: Under the effective demand principle, the equilibrium output is equal to exante Aggregate Demand (AD). In the light of the given statements, choose the correct alternative from the following:- In a hypothetical economy, if entire additional income is consumed, the value of investment multiplier would be . (Fill up the blank with the correct alternative.)
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