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CA Foundation · Business Economics · Determination of National Income

In Keynes's theory, the investment multiplier would be highest in an economy where:

The multiplier is highest where MPC is 0.9, giving k = 1/(1 - 0.9) = 10. The other options yield multipliers of 2.5, 2.5 and 2. A larger share of extra income spent on consumption means less leakage into saving and bigger repeated rounds of spending.

  1. AMPC is 0.9Correct
  2. BMPC is 0.6
  3. CMPS is 0.4
  4. DMPC is 0.5

Explanation

Multiplier k = 1/(1 - MPC) = 1/MPS. With MPC 0.9, k = 10. MPC 0.6 gives 2.5, MPS 0.4 gives 2.5, MPC 0.5 gives 2. A higher MPC means smaller leakage into saving and a larger multiplier.

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