Which is wrong ? (K = Multiplier)

Question

Accepted Answer

The correct option is 4:

The question asks which statement about the Keynesian Investment Multiplier (K) is **wrong**. The Investment Multiplier describes the relationship between an initial increase in investment and the resulting total increase in national income. The concept is central to Keynesian macroeconomics. The correct formulas for the investment multiplier are derived from the Marginal Propensity to Consume (MPC) and the Marginal Propensity to Save (MPS). Since Option 4, K = 1 / MPC, is not a valid formula for the multiplier, it is the incorrect statement, making it the correct answer to this "Which is wrong?" question. MPC represents the proportion of additional income that is spent on consumption, and using it in this reciprocal form gives a meaningless value for the multiplier. The relationship between MPC and MPS is that MPC + MPS = 1.

The incorrect option is 1:
K = ΔY / ΔI is the definitional formula for the multiplier. It states that the multiplier (K) is the ratio of the change in income ($\Delta$Y) resulting from a change in investment ($\Delta$I). This is a fundamental and correct representation of the multiplier effect.

The incorrect option is 2:
K = 1 / (1-MPC) is a correct and commonly used formula for the multiplier. Since $1 - \text{MPC}$ is equal to the Marginal Propensity to Save (MPS), this formula accurately shows how consumption behavior determines the magnitude of the multiplier.

The incorrect option is 3:
K = 1 / MPS is also a correct formula for the multiplier. This inverse relationship shows that the smaller the MPS (meaning a larger MPC), the larger the multiplier will be, as less income leaks out of the spending stream.