Practicing Success
Identify the statement which is not true related to investment mutiplier and propensity to consume. |
When MPC = MPS, Multiplier in equal to 2 When MPC = 0, Multiplier in equal to infinity The least value of Multiplier is unity The Multiplier represents the proportional relationship between change in income and change in investment |
When MPC = 0, Multiplier in equal to infinity |
The correct answer is option (2) : When MPC = 0, Multiplier in equal to infinity Option 1: When MPC = MPS, Multiplier in equal to 2 : This is true. Since MPC + MPS always equals 1, if MPC = MPS, then both must be equal to 0.5 (or 50%). Multiplier (k) = 1 / MPS k =1/0.5 = 2 Option 2: When MPC = 0, Multiplier in equal to infinity. This is false. Multiplier (k) = 1 / (1-MPC) k= 1/(1-0) = 1 Option 3: The least value of Multiplier is unity. This is true. The smallest practical value of the multiplier occurs when MPC is 0 (or 0%), which means that households save all additional income. In this case, the multiplier formula simplifies to: Multiplier=1 / (1-MPC) k= 1/(1-0) = 1 Therefore, the statement that the least value of the multiplier is unity (1) is accurate because it corresponds to the scenario where MPC is 0 and there is no multiplier effect. Option 4: The Multiplier represents the proportional relationship between change in income and change in investment. This is true. |