Sponsor Area

Determination Of Income And Employment

Question
CBSEENEC12013567

Explain the relationship between investment multiplier and marginal propensity to consume. 

Solution

Investment multiplier implies that any change in the investment leads to a corresponding change in the income and output by multiple times. That is, in other words, the change in the income and output is more than (or multiple times of) the change in investment.
Investment Multiplier, K = △Y/△I
Investment Multiplier shares a direct positive relationship with marginal propensity to consume. That is, higher the value of MPC, higher will be the value of investment multiplier and vive-versa. That is Higher the proportion of increased income spend on consumption, higher will be value of investment multiplier.
Algebraically, the relationship is expressed as follows.
K= 1/(1- MPC)