If the marginal propensity to consume is 0.8. The value of the investment multiplier will be :
Answer & explanation
Correct answer: option 2
The correct answer is option (2) : 5
The investment multiplier represents the overall increase in the national income resulting from an initial increase in investment. It is calculated using the formula :
Multiplier $=\frac{1}{1-MPC}$
where MPC is the marginal propensity to consume.
If the marginal propensity to consume (MPC) is 0.8, then the value of the investment multiplier is :
Multiplier $=\frac{1}{1-0.8}=\frac{1}{0.2}= 5 $
Therefore, the value of the investment multiplier is 5 corresponding to option (2) .