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Explain the relationship between MPC and …

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Explain the relationship between MPC and investment multiplier

Posted by Manav Sharma 4 years, 8 months ago

CBSE > Class 12 > Economics

1 answers

Gaurav Seth 4 years, 8 months ago

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)

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