Based on the following diagram answer the question :

Identify the correct statement from the following statements :

MPS and investment multiplier are inversely related to each other

The correct answer is option (2) : MPS and investment multiplier are inversely related to each other

Explanation :

The Marginal Propensity to Save (MPS) is the fraction of additional income that a household saves, and it is related to the Marginal Propensity to Consume (MPC) through the equation : MPS + MPC = 1.

The investment multiplier is inversely related to the MPS.

The multiplier (k) is calculated as $k =\frac{1}{1-mpc}$ or $k =\frac{1}{mps}$,

so as MPS increases, the multiplier decreases, and vice versa.

Option 1: MPS and investment multiplier are directly related to each other: Incorrect

• Explanation: This statement is incorrect. The investment multiplier (k) is given by the formula $k =\frac{1}{mps}$. Thus, MPS and the investment multiplier are inversely related.

Option 3: MPC and investment multiplier are inversly related to each other: Incorrect

The investment multiplier can be expressed as $k =\frac{1}{1-mpc}$​. Thus, when MPC increases, the denominator (1−MPC) decreases, leading to an increase in the multiplier. Therefore, there is a direct relation between MPC and Multiplier and not inverse.

Option 4: MPC and MPS both have no relation with investment multiplier: This statement is incorrect. Both MPC and MPS are directly related to the calculation of the investment multiplier, as shown in the formulas above.