Multipliers will be lower with which one of the following?

[amp_mcq option1=”High marginal propensity to consume” option2=”Low marginal propensity to consume” option3=”High marginal propensity to invest” option4=”Low marginal propensity to save” correct=”option2″]

This question was previously asked in

UPSC CAPF – 2018

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The correct answer is B) Low marginal propensity to consume.

In the simple Keynesian model, the multiplier (k) is given by the formula k = 1 / (1 – MPC), where MPC is the Marginal Propensity to Consume. MPC is the proportion of an increase in income that is spent on consumption.
– If MPC is high, (1 – MPC) is low, and the multiplier (1 / (1 – MPC)) is high.
– If MPC is low, (1 – MPC) is high, and the multiplier (1 / (1 – MPC)) is low.
Therefore, multipliers will be lower with a low marginal propensity to consume.

The Marginal Propensity to Save (MPS) is the proportion of an increase in income that is saved. MPC + MPS = 1. So, the multiplier can also be written as k = 1 / MPS. A low MPC means a high MPS, and k = 1 / (high MPS) will be low. Conversely, a high MPC means a low MPS, and k = 1 / (low MPS) will be high.

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