In an economy, the consumption curve and saving curve are parallel to each other. What will be the value of investment multiplier in this economy?

2

The correct answer is Option (2) → 2

$$\genfrac{}{}{0ex}{}{\Delta Y}{\Delta C/}$$

$$\genfrac{}{}{0ex}{}{\Delta Y}{\Delta S/}$$

For the Consumption Curve and the Saving Curve to be parallel to each other, it means their slopes must be the same. i.e $$\text{Slope of }C\text{ curve}=\text{Slope of }S\text{ curve}$$

$$\text{i.e. MPS = MPC }$$

We know 1=MPC+MPS

Thus, MPC = MPS = 0.5

The formula for the investment multiplier is: $$K=\; 1\; /\; (1\; -MPC)$$

$$=\; 1\; /\; 0.5\; =\; 2$$