The investment multiplier is equal to which of the following?

The correct answer is Option (3) → Reciprocal of marginal propensity to save.

The investment multiplier is 1 divided by the marginal propensity to save (MPS). The MPS is the part of extra income that is saved.

It is the total rise in equilibrium output (ΔY) divided by the first rise in autonomous spending, such as investment (ΔA). Extra investment becomes income, a part of it is spent, and that spending becomes income again. With c as the marginal propensity to consume:

\( \displaystyle \text{Multiplier} = \frac{\Delta Y}{\Delta A} = \frac{1}{1 - c} \)

Since 1 − c is the MPS:

\( \displaystyle \text{Multiplier} = \frac{1}{MPS} \)