Subjective Type

What is the range of values of investment multiplier? Clarify the relation of investment multiplier with marginal propensity to consume (MPC) and with marginal propensity to save (MPS).

Solution

The range of investment multiplier is from one to infinity. The minimum value of the multiplier can be 1 when there is one time change in income or when MPC= 0 and the maximum value of the multiplier can be Infinity when there in infinite times of change in income or MPC=1. The value of the multiplier and MPC are directly related as the change in consumption in respect to a given change in income becomes the change in investment which keeps on rotating unless the income becomes zero Where as the value of multiplier and MPS are inversely related as multiplier is the reciprocal of MPS.

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