What will be the correct option which fits best in the below statement?
Investment Multiplier will be high when _________
Answer & explanation
Correct answer: option 1
The correct answer is option 1: MPC is high
There is a direct relation in MPC and Investment Multiplier. That means when MPC increases Investment Multiplier also increases and vice-versa.
The formula for the investment multiplier is:
k=1/(1-MPC)
When MPC is high, 1−MPC is low, making the denominator in the multiplier formula smaller. This results in a higher multiplier.