Question

If \(MPC = 0.5\), what will be the value of the Investment Multiplier (\(K\))?

• A. 1
• B. 2
• C. 4
• D. 5

Hint:

Since $MPS = 1 - MPC$, the multiplier formula can also be written as $K = \frac{1}{MPS}$. Higher the MPC, higher the Multiplier, and vice versa.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The investment multiplier (\(K\)) explains the relationship between an initial increase in investment and the resulting increase in national income.
Step 2: Key Formula or Approach:
The formula for the multiplier in relation to the Marginal Propensity to Consume (\(MPC\)) is:
\[ K = \frac{1}{1 - MPC} \] Step 3: Detailed Explanation:
Given: \(MPC = 0.5\)
Substituting the value into the formula:
\[ K = \frac{1}{1 - 0.5} \]
\[ K = \frac{1}{0.5} \]
\[ K = 2 \]
Step 4: Final Answer:
The value of the Investment Multiplier is 2, which means income will increase by twice the amount of the initial investment.