Question
Define multiplier. What is the relation between marginal propensity to consume and multiplier? Calculate the marginal propensity to consume if the value of multiplier is 4.
✓
Answer
"The multiple increase in income due to increase in investment, is known as multiplier." or "Multiplier means the ratio of change in income to the change in investment".$\text{K}\frac{\Delta\text{Y}}{\Delta\text{l}}$
Here K = Multilier;$\Delta\text{Y}$ = Change in Income;
$\Delta\text{l}$ = Change in investment.
There is a positive relationship between MPC and K. As the value of MPC increases the value of multiplier will also increases and as the value of MPC decreases the value of multiplier will also decreases.$\text{K}=\frac{1}{1-\text{MPC}}$
As the value of MPC increases, means consumption expenditure increases and due to increase in consumption expenditure, income generation will also increases (because expenditure of one person is income of another person). Due to increase in income generation the effect of multiplier will also increases and thatís why the value of multiplier will also increases and vice-versa. k = 4, MPC = ?$\Rightarrow\ \text{k}=\frac{1}{1-\text{MPC}}\ \Rightarrow\ 4=\frac{1}{1-\text{MPC}}$
$\Rightarrow 4-4\text{ MPC}=1\ \Rightarrow -4\text{ MPC}=1-4$
$\Rightarrow +4\text{ MPC}=+3\ \Rightarrow\ \text{MPC}=\frac{3}{4}=0.75$
Here K = Multilier;$\Delta\text{Y}$ = Change in Income;
$\Delta\text{l}$ = Change in investment.
There is a positive relationship between MPC and K. As the value of MPC increases the value of multiplier will also increases and as the value of MPC decreases the value of multiplier will also decreases.$\text{K}=\frac{1}{1-\text{MPC}}$
As the value of MPC increases, means consumption expenditure increases and due to increase in consumption expenditure, income generation will also increases (because expenditure of one person is income of another person). Due to increase in income generation the effect of multiplier will also increases and thatís why the value of multiplier will also increases and vice-versa. k = 4, MPC = ?$\Rightarrow\ \text{k}=\frac{1}{1-\text{MPC}}\ \Rightarrow\ 4=\frac{1}{1-\text{MPC}}$
$\Rightarrow 4-4\text{ MPC}=1\ \Rightarrow -4\text{ MPC}=1-4$
$\Rightarrow +4\text{ MPC}=+3\ \Rightarrow\ \text{MPC}=\frac{3}{4}=0.75$
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