MPC & MULTIPLIER

November 2017, Paper III
Question no: 16
Consider the following statements describing the relationship between marginal propensity to consume and the value of multiplier
1. As MPC increases, multiplier decreases
2. As MPC increases, multiplier increases
3. MPC =1, multiplier = ∞
Which of the statements are correct?

a) (2) alone
b) (2) and (3)
c) (1) alone
d) (3) alone
Answer B
In economics, a multiplier broadly refers to an economic factor that, when increased or changed, causes increases or changes in many other related economic variables. In terms of gross domestic product, the multiplier effect causes gains in total output to be greater than the change in spending that caused it. Multiplier = 1/ 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑜𝑝𝑒𝑛𝑠𝑖𝑡𝑦 𝑡𝑜 𝑠𝑎𝑣𝑒(𝑚𝑝𝑠) = 1 / 1−𝑚𝑝𝑐

Larger the marginal propensity to consume, larger will be the multiplier. Also when mpc=1, mps=0 and hence the multiplier becomes infinity.