Practicing Success
What will be the value of investment multiplier if the consumption function undergoes a parallel shift upwards? |
rise fall remains constant be double |
remains constant |
the correct answeris option 3: remains constant The value of multiplier is affected from MPC. MPC is also called as the slope of consumption curve. Thus, the value of multiplier will only be affected when there change in the MPC. According to the question, there is a parallel shift in the consumption curve. A parallel shift upwards in the consumption function means that at each level of income, consumption is higher. This shift results in an increase in aggregate demand. However, the investment multiplier is primarily influenced by the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS). The formula for the investment multiplier is: Investment Multiplier=1MPS Since a parallel shift in the consumption function affects the level of consumption but does not directly change the MPC or MPS, the investment multiplier remains constant. |