question_answer

Define multiplier. What is relation between marginal propensity to consume and multiplier? Calculate the marginal propensity to consume if the value of multiplier is 4.

Answer:

In economics a multiplier is the factor by which gains in total output are greater than the change in spending that caused it. It is usually used in reference to the relationship between investment and total national income.

Relationship between marginal propensity to consume and multiplier

There is a direct relationship between MPC and Multiplier as, the higher the MPC, the higher the multiplier and vice versa.

\[\Rightarrow \]   \[\text{Multiplier}=\frac{1}{1-MPC}\]

\[\Rightarrow \]   \[4=\frac{1}{1-MPC}\]

\[\Rightarrow \]   MPC = 0.75

\[\therefore \]      MPC = 0.75