Which of the following statement/statements are true?
Statement 1: Higher the value of MPC, lower the value of multiplier.
Statement 2: Higher the value of MPS, lower the value of multiplier.
Answer & explanation
Correct answer: option 4
The correct answer is option 4: Statement 2 is true and Statement 1 is false
Statement 1: Higher the value of MPC, lower the value of multiplier. This is false. The relationship between the Marginal Propensity to Consume (MPC) and the multiplier is inverse.
The multiplier (k) is calculated as: \(\frac{1}{MPS}\) or \(\frac{1}{\text{1 – MPC}}\)
When MPC increases, 1−MPC decreases, causing the multiplier to increase. Thus, a higher MPC leads to a higher multiplier.
Statement 2: Higher the value of MPS, lower the value of multiplier. This is true. When MPS increases, the denominator in the multiplier formula increases, which results in a lower multiplier.