2018 · Q110
Multipliers will be lower with which one of the following?
indian-polity-economyeconomy-fundamentals
- AHigh marginal propensity to consume
- BLow marginal propensity to consume
- CHigh marginal propensity to invest
- DLow marginal propensity to save
Explanation
The investment multiplier equals 1/(1−MPC) = 1/MPS. A lower marginal propensity to consume (equivalently, a higher MPS) shrinks the multiplier, since less of each round of income is re-spent. A high MPC or low MPS would raise it instead. Hence the multiplier is lower with a low marginal propensity to consume.