Question

If MPC > MPS, what is true about the investment multiplier (K)?

• A. K > 2
• B. K < 2
• C. K = 1
• D. K = ∞

Answer 1

The Correct Option is A

The relationship between the Marginal Propensity to Consume (MPC), the Marginal Propensity to Save (MPS), and the investment multiplier (K) is established through the multiplier formula:

\[ K = \frac{1}{1 - MPC} \]

Definitions are as follows:

• MPC denotes the Marginal Propensity to Consume.
• MPS signifies the Marginal Propensity to Save, with the relationship MPS = 1 - MPC.

The condition MPC > MPS leads to:

• MPC > (1 - MPC)

Consequently, when MPC > 0.5:

• \( K = \frac{1}{1 - MPC} \)

Illustrative example with MPC = 0.6:

• \( K = \frac{1}{1 - 0.6} \)
• \( K = \frac{1}{0.4} = 2.5 \)

Therefore, if MPC > MPS, the investment multiplier K exceeds 2.

The conclusion is: K > 2