Question

Suppose Marginal Propensity to Consume (MPC) is \(0.75\). The value of the investment multiplier will be:

• A. \(2\)
• B. \(3\)
• C. \(4\)
• D. \(5\)

Hint:

The higher the MPC, the larger the multiplier. If MPC approaches 1, the multiplier becomes very large.

Answer 1

The Correct Option is C

Concept: The investment multiplier explains how a change in investment causes a multiple change in national income. Formula: \[ K=\frac{1}{1-MPC} \] where \[ K=\text{Multiplier} \] \[ MPC=\text{Marginal Propensity to Consume} \]

Step 1: Substitute the value of MPC. Given: \[ MPC=0.75 \] \[ K=\frac{1}{1-0.75} \] \[ K=\frac{1}{0.25} \] \[ K=4 \]

Step 2: Economic Interpretation. This means that every additional ₹1 invested in the economy generates ₹4 increase in national income. For example: \[ \Delta I=100 \] then \[ \Delta Y=400 \]

Step 3: Select the correct option. \[ K=4 \] Hence Option (C) is correct.