What will be the value of multiplier if 60% increase in income is consumed?
Answer & explanation
Correct answer: option 1
The correct answer is option 1: 2.5
The formulae for Keynesian Investment Multiplier is:
k = \(\frac{1 }{\text 1 - MPC }\)
If 60% of increase in income is consumed then MPC can be written as 0.6
So,
k = \(\frac{1 }{\text 1 - 0.6}\)
k = \(\frac{1 }{\text 0.4}\)
k = \(\frac{10 }{\text 4}\)
k = 2.5