CBSE 2018 Class 12 Economics Re-Exam

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Question : 5
Total: 15
Define investment multiplier. How is it related to marginal propensity to consume?
Solution:  
The number of times by which income increases as a result of increase in investment is called investment multiplier. Investment multiplier shows a relationship between initial increment in investment and the resulting increment in national income.
K‌=‌
∆Y
∆I

where K‌=‌ multiplier ‌
∆Y‌=‌ change in income ‌
∆I‌=‌ change in investment ‌
Relation of multiplier with MPC :
‌K=‌
∆Y
∆I

‌K=‌
∆Y
∆C

(Dividing this equation by ∆Y we get)
K‌=‌
∆Y
∆Y−∆C

‌=‌
‌
∆Y
∆Y
∆Y
∆Y
−‌
∆C
∆Y
=‌
1
1−MPC

There is a direct relation between K and MPC. If MPC is high, K will also be high but if MPC is low K will also be low.
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