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
The formulae for Keynesian Investment Multiplier is:
k = \(\frac{1 }{\text 1 - MPC }\)
If 40% of increase in income is saved then MPS is 0.4 and the value of MPC can be written as 0.6 as, MPC = 1 - MPS
So,
k = \(\frac{1 }{\text 1 - MPC }\)
k = \(\frac{1 }{\text 1 - 0.6 }\)
k = \(\frac{1 }{\text 0.4 }\)
k = \(\frac{10 }{\text 4}\)
k = 2.5