Arrange the following economies in increasing order of the size of their investment multiplier:
(A) An economy with an MPC of 0.5
(B) An economy with an MPC of 0.9
(C) An economy with an MPS of 0.25
(D) An economy with an MPC of 0.6
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (D), (C), (B)
The multiplier is 1 / (1 − c) = 1 / s, so it grows as the MPC grows.
(A) MPC 0.5 — multiplier = 1 / 0.5 = 2
(D) MPC 0.6 — multiplier = 1 / 0.4 = 2.5
(C) MPS 0.25 — multiplier = 1 / 0.25 = 4
(B) MPC 0.9 — multiplier = 1 / 0.1 = 10
NCERT (2026-27): “4.3.3 The Multiplier Mechanism … The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy. Recalling that 10 and 0.8 represent the values of ΔI = ΔA and mpc, respectively, the expression for the multiplier can be explained as”
“where ΔY is the total increment in final goods output and c = mpc . Observe that the size of the multiplier depends on the value of c . As c becomes larger the multiplier increases.” |
