Question

Calculate Multiplier when MPC is 4/5 and 1/2. From the calculations establish the relation between size of Multiplier and size of MPC.

Answer 1

`"Multiplier" =(1)/(1-MPC)`
`"When MPC "=(4)/(5),`
`K=(1)/(1-0.8)=(1)/(0.2)=5`
`"When MPC"=(1)/(2)`
`K=(1)/(1-0.5)=(1)/(0.5)=2`
Observing the same we may conclude that there exist positive or direct relation hetween MPC and Investment Multiplier. Investment Multiplier coefficient measures the change in final income with respect to given change in the initial investment in the economy. It carries rlirect relation with rate. of growth in an economy, i.e. higher the MPC more chance of growth exists in an economy. But, it is il two sided sword hence if investment falls in an economy the income may also fall.