Question : Value of MPS (Marginal Propensity to Save) is increased from 0.4 to 0.5. What would be the impact on Multiplier?
Option 1: The size of the multiplier would be increased.
Option 2: The size of the multiplier would remain same.
Option 3: Value of multiplier is undetermined with the given information.
Option 4: The size of the multiplier would be decreased.
Correct Answer: The size of the multiplier would be decreased.
Solution : There is an inverse relationship between the value of the multiplier and MPS. If MPS = 0.4, then Investment Multiplier = 1/MPS = 1/0.4 = 2.5. If MPS = 0.5, then Investment Multiplier = 1/MPS = 1/0.5 = 2. It clearly shows, the size of the multiplier would be decreased with the increase in MPS.
