Define investment multiplier. Explain the relationship between marginal propensity to save and investment multiplier.
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Investment multiplier is defined as the ratio of change in income due to change in investment. Symbolically,$\text{Multiplier(k)}=\frac{\Delta\text{Y}}{\Delta\text{I}}.$
Relationship between Multiplier and MPS: The value of the multiplier varies inversely with MPS. Higher the MPS, the lower will be the size of multiplier and lower the MPS, the larger will be the value of the multiplier. The relationship can be expressed as,$\text{k}=\frac{1}{\text{MPS}}$
For example, if MPS = 0.4,then,$\text{k}=\frac{1}{\text{MPS}}=\frac{1}{0.4}=2.5$
If MPS = 0.1 then, $\text{k}=\frac{1}{\text{MPS}}=\frac{1}{0.1}=10$ Thus, it is clear price from above that, higher the MPS, the smaller will be the size of multiplier and lower the MPS, the larger will be the size of multiplier. Thus, the size of multiplier and MPS are inversely related.
Relationship between Multiplier and MPS: The value of the multiplier varies inversely with MPS. Higher the MPS, the lower will be the size of multiplier and lower the MPS, the larger will be the value of the multiplier. The relationship can be expressed as,$\text{k}=\frac{1}{\text{MPS}}$
For example, if MPS = 0.4,then,$\text{k}=\frac{1}{\text{MPS}}=\frac{1}{0.4}=2.5$
If MPS = 0.1 then, $\text{k}=\frac{1}{\text{MPS}}=\frac{1}{0.1}=10$ Thus, it is clear price from above that, higher the MPS, the smaller will be the size of multiplier and lower the MPS, the larger will be the size of multiplier. Thus, the size of multiplier and MPS are inversely related.
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