Explain the relationship between marginal propensity to consume and investment multiplier.
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Relationship between Multiplier and MPC: The value of the multiplier varies directly with MPC. Higher the MPC, the higher will be the value of the multiplier and lower the MPC, the smaller will be the value of multiplier. The relationship is expressed as:$\text{k}=\frac{1}{1-\text{MPC}}$
For example, if MPC = 0.5 then, $\text{k}=\frac{1}{1-0.5}=\frac{1}{0.5}=2$ For example, if MPC = 0.75, then, $\text{k}=\frac{1}{1-0.75}=\frac{1}{0.25}=4$ It is clear from above that higher the MPC, the larger will be the size of multiplier and lower the MPC, the smaller will be the size of multiplier. Thus, the size of multiplier varies directly with MPC.
For example, if MPC = 0.5 then, $\text{k}=\frac{1}{1-0.5}=\frac{1}{0.5}=2$ For example, if MPC = 0.75, then, $\text{k}=\frac{1}{1-0.75}=\frac{1}{0.25}=4$ It is clear from above that higher the MPC, the larger will be the size of multiplier and lower the MPC, the smaller will be the size of multiplier. Thus, the size of multiplier varies directly with MPC.
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