If the value of MPC is equal to 0.8, then the value of 'K' will be :

Question

Accepted Answer

The correct option is 2:
The investment multiplier (K) is a key concept in Keynesian economics that measures the ultimate change in national income resulting from an initial change in investment. The multiplier's magnitude is directly related to the Marginal Propensity to Consume (MPC), which is the fraction of additional income that households spend on consumption. The relationship is defined by the formula: K = 1 / (1 - MPC), or K = 1 / MPS (Marginal Propensity to Save). Given that the value of MPC is 0.8, we can calculate K as follows: K = 1 / (1 - 0.8) = 1 / 0.2 = 5. This result of 5 means that a one-unit increase in investment will ultimately lead to a five-unit increase in the total national income. A high MPC results in a larger multiplier because a greater proportion of new income is re-spent in subsequent rounds, amplifying the original injection.

The incorrect option is 1: This value of 2 would imply an MPC of 0.5 (since K = 1 / (1 - 0.5) = 2). This contradicts the given value of MPC = 0.8.
The incorrect option is 3: The value 10 would imply an MPC of 0.9 (since K = 1 / (1 - 0.9) = 10). This value is higher than the given MPC and is therefore incorrect.
The incorrect option is 4: The value 8 would imply an MPC of 0.875 (since K = 8, 1/8 = 0.125 = MPS; 1 - 0.125 = 0.875). This value is not consistent with the given MPC of 0.8.