What will be the value of multiplier if 40% of the additional income is saved?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 2.5
Given:
40 per cent of additional income is saved, so MPS = 0.4
The investment multiplier is 1 / MPS.
\( \displaystyle k = \frac{1}{0.4} = 2.5 \)
The multiplier is 2.5.
Option (3) 1.67 — this is 1 / 0.6, which uses the MPC by mistake.
NCERT (2026-27): “4.1.1 Consumption … Let us also look at another dimension of this, savings. Savings is that part of income that is not consumed. … We define the marginal propensity to save (MPS) as the rate of change in savings as income increases. …” “4.3.3 The Multiplier Mechanism … The increment in equilibrium value of total output thus exceeds the initial increment in autonomous expenditure. The ratio of the total increment in equilibrium value of final goods output to the initial increment in autonomous expenditure is called the investment multiplier of the economy. Recalling that 10 and 0.8 represent the values of ΔI = ΔA and mpc, respectively, the expression for the multiplier can be explained as”
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