Explain the meaning of investment multiplier. What can be its minimum and maximum value and why?
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Investment multiplier is defined as the ratio of change in income to change in investment. Symbolically,$\text{Multiplier(k)}=\frac{\Delta\text{Y}}{\Delta\text{I}}$
The value of the multiplier is determined by Marginal Propensity to Consume (MPC). It is directly related with MPC. In terms of an equation, the relation is written as:$\text{k}=\frac{1}{1-\text{MPC}}$
Minimum value of k: As the minimum value of MPC is zero, so the minimum value of k will be one. It is shown as:$\text{k}=\frac{1}{1-\text{MPC}}=\frac{1}{1-0}=1$
Thus, the minimum value of k is one. Maximum value of k is infinity, i.e., if MPC is one.$\text{k}=\frac{1}{1-\text{MPC}}=\frac{1}{1-1}=\frac{1}{0}=\infty$
The value of the multiplier is determined by Marginal Propensity to Consume (MPC). It is directly related with MPC. In terms of an equation, the relation is written as:$\text{k}=\frac{1}{1-\text{MPC}}$
Minimum value of k: As the minimum value of MPC is zero, so the minimum value of k will be one. It is shown as:$\text{k}=\frac{1}{1-\text{MPC}}=\frac{1}{1-0}=1$
Thus, the minimum value of k is one. Maximum value of k is infinity, i.e., if MPC is one.$\text{k}=\frac{1}{1-\text{MPC}}=\frac{1}{1-1}=\frac{1}{0}=\infty$
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