Suppose in an economy, it is decided that the entire additional income earned will be saved. In such a situation, what will be the value of investment multiplier?
Answer & explanation
Correct answer: option 1
The correct answer is option 1: One
In this scenario, if the entire additional income earned is saved, then the Marginal Propensity to Consume (MPC) is zero. This means that no part of the additional income is spent on consumption, and thus, the only part that is available is saved.
MPS = \(\frac{∆S}{∆Y}\) = 1 as ∆S = ∆Y.
Then, Multiplier = \(\frac{1}{\text{1-MPC}}\)
= \(\frac{1}{MPS}\)
= \(\frac{1}{1}\)
= 1