If MPC > MPS, which of the following statements will be true about investment multiplier (K)?

$K > 2$

The correct answer is Option (1) → $K > 2$

Here's why:

• Investment Multiplier (K):

  • K = 1 / MPS
  • Where MPS is the Marginal Propensity to Save.

• Relationship between MPC and MPS:

  • MPC + MPS = 1
  • If MPC > MPS, then MPS must be less than 0.5.

• Calculating the Multiplier:

  • If MPS is less than 0.5, then 1/MPS will be greater than 2.

Example: If MPS = 0.4 (and therefore MPC = 0.6), then K = 1 / 0.4 = 2.5  

• Option 3: $K=1$ - Incorrect. This would imply MPS = 1, or MPC = 0, which contradicts MPC > MPS.
• Option 4: $K=\infty$ - Incorrect because it would require MPS = 0, or MPC = 1, which is not a realistic interpretation of the condition MPC > MPS in typical economic situations. In real-world terms, people do not spend 100% of additional income (i.e., MPC < 1), so the multiplier K is large, but finite.

Thus, Option 1: K>2 is the best and correct answer.