Question

What is the range of values of investment multiplier?

Answer 1

The range of investment multiplier is greater than 1 but less than infinity .

Let us do the algebric derivation of the investment multiplier to find out its relation with MPC and MPS , marginal propensity to consume and marginal propensity to save .

At equilibrium level of income :Y= C+IWriting in terms of changes in variables:△Y=△C+△IConsumption function:C=a+bY a=autonomous consumption (a constant term)b=MPC△C=b△Y

△Y=b△Y+△ISolving this we get:(1−b)△Y=△Ior,△Y△I=11−b

△Y△I=11−MPC=1MPS

Note that the value of multiplier ∆Y/∆I will remain constant as long as marginal propensity to consume remains the same . Hence we obtain the relation of investment multiplier with MPC and MPS .