Q.The Multiplier is calculated as :
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The investment multiplier (k) measures how a change in autonomous investment produces a larger, magnified change in equilibrium national income. It is defined as k=1−MPC1=MPS1.
The multiplier works because one person's spending is another person's income. An initial injection of investment is spent, re-spent, and spent again in successive rounds, so total income rises by a multiple of the original investment. The size of that multiple depends entirely on the MPC.
The formula
k=ΔIΔY=1−MPC1=MPS1
Since MPC + MPS = 1, (1−MPC)=MPS, so the multiplier is simply the reciprocal of the marginal propensity to save.
How and why it works
Suppose the government/firms invest an extra ₹100 and MPC = 0.8. The ₹100 becomes income for the recipients, who spend 80% (₹80); that ₹80 becomes income for others, who spend ₹64; and so on. The rounds form a geometric series: 100(1+0.8+0.82+…)=100×1−0.81=100×5=₹500.
Worked illustration
With MPC = 0.8: k=1/(1−0.8)=1/0.2=5. A ₹100 crore rise in investment raises national income by 5×100=₹500 crore. If MPC were 0.5, k=2, and the same investment would raise income by only ₹200 crore.
Key relationships
- Higher MPC → higher multiplier (more of each round is re-spent). …
The investment multiplier can be written using either the marginal propensity to consume or the marginal propensity to save, and the two formulas are equal. …
The multiplier equals 1/(1 – MPC), which is the same as 1/MPS.
The investment multiplier (k) measures how much national income rises for a given rise in investment. It is defined as:
k = 1 / (1 – MPC)
Since MPC + MPS = 1, we have 1 – MPC = MPS. Substituting gives:
k = 1 / MPS
…
- CA Foundation 2026Set may-20261 markMCQQ.There is an increase in the national income by ₹ 2,000 crores when there is an increase in investments by ₹ 1,600 crores. Calculate the marginal propensity to consume. (A) 0.80 (B) 0.50 (C) 0.20 (D) 0.40
›Reveal solutionSolution
Multiplier k = ΔY/ΔI = 1.25 ⇒ MPC = 1 − 1/k = 0.20.
Step 1 — Find the multiplier
k=ΔIΔY=16002000=1.25
Step 2 — Relate the multiplier to MPC
k=1−MPC1
Step 3 — Solve for MPC
1.25=1−MPC1
1−MPC=1.251=0.8
MPC=1−0.8=0.20
Step 4 — Eliminate the others …
- CA Foundation 2026Set may-20261 markMCQQ.Which of the following statements correctly explains the relationship between Marginal Propensity to Consume (MPC), Marginal Propensity to Save (MPS), and the value of the investment multiplier? (A) Higher the MPC more will be the value of investment multiplier (B) Higher the MPS more will be the value of investment multiplier (C) Lower the MPC more will be the value of investment multiplier (D) Lower the MPS less will be the value of investment multiplier
›Reveal solutionSolution
Multiplier k = 1/(1 − MPC) = 1/MPS, so a higher MPC (lower MPS) gives a larger multiplier — statement (A).
Step 1 — State the multiplier formula
k=1−MPC1=MPS1
with the identity MPC + MPS = 1.
Step 2 — See how k responds to MPC and MPS
- A higher MPC makes the denominator (1 − MPC) smaller, so k is larger.
- Equivalently, a higher MPS makes k = 1/MPS smaller.
Step 3 — Test each statement
- (A) Higher MPC → higher multiplier — TRUE, matches the formula.
- (B) Higher MPS → higher multiplier — false (higher MPS lowers k).
- (C) Lower MPC → higher multiplier — false (lower MPC lowers k).
- (D) Lower MPS → lower multiplier — false (lower MPS raises k).
Step 4 — Numerical check …
- CA Foundation 2025Set jan-20251 markMCQQ.In an economy investment expenditure is increased by ₹ 300 crores and marginal propensity to consume is 0.6. Calculate the total increase in income. (A) ₹ 300 crores (B) ₹ 100 crores (C) ₹ 650 crores (D) ₹ 750 crores
›Reveal solutionSolution
k=1−MPC1=2.5, so ΔY=k×ΔI=2.5×300=750 crores.
Step 1 — The multiplier formula
The investment multiplier links a change in investment to the eventual change in income:
k=1−MPC1=MPS1
Step 2 — Compute the multiplier
k=1−0.61=0.41=2.5
Step 3 — Apply it to the investment change
ΔY=k×ΔI=2.5×300=750 crores
Why the other options are wrong
- (A) ₹300 crores ignores the multiplier (assumes k = 1).
- (B) ₹100 crores has no valid derivation. …
- CA Foundation 2025Set jan-20251 markMCQQ.The investment multiplier is defined as the ratio of : (A) change in investment due to change in saving (B) change in demand due to change in investment (C) change in consumption due to change in investment (D) change in national income due to change in investment
›Reveal solutionSolution
The investment multiplier is k=ΔIΔY — the ratio of the change in income to the change in investment.
Step 1 — Definition
When investment rises, the extra spending becomes someone's income, part of which is re-spent, and so on. The multiplier captures the total, magnified effect on national income:
k=ΔIΔY=1−MPC1
Step 2 — Read the ratio correctly
Income (ΔY) is on top, investment (ΔI) at the bottom. So the multiplier is 'change in national income due to change in investment'.
Step 3 — Why the other options are wrong
- (A) links investment to saving — that is not the multiplier.
- (B) 'change in demand due to change in investment' is loosely worded and not the standard definition. …
- CA Foundation 2025Set sep-20251 markMCQQ.The maximum value of investment multiplier will be the infinity when the value of : (A) MPC is 1. (B) MPC is –1. (C) APC is 1. (D) MPS is –1.
›Reveal solutionSolution
k=1/(1−MPC) is infinite when 1−MPC=0, i.e. MPC = 1.
Step 1 — The multiplier formula
k=1−MPC1=MPS1
The multiplier grows as MPC rises toward 1 (equivalently, as MPS falls toward 0).
Step 2 — When does it become infinite?
A fraction blows up to infinity only when its denominator approaches zero:
1−MPC=0⇒MPC=1⇒MPS=0
With MPC = 1 every additional rupee of income is re-spent, so successive rounds of spending never leak away and the multiplier is theoretically infinite.
Why the other options are wrong
- (B) MPC = −1 and (D) MPS = −1 are economically impossible; MPC and MPS lie between 0 and 1. …
- CA Foundation 2025Set sep-20251 markMCQQ.If national income increases from ₹ 500 crores to ₹ 2,500 crores due to an increase in investment of ₹ 200 crores, what will be the value of the Marginal Propensity to Consume (MPC) ? (A) 0.90 (B) 0.85 (C) 0.75 (D) 0.95
›Reveal solutionSolution
k=ΔY/ΔI=2000/200=10=1/(1−MPC) ⇒ MPC = 0.90.
Step 1 — Find the multiplier
k=ΔIΔY=2002,500−500=2002,000=10
Step 2 — Link the multiplier to MPC
k=1−MPC1⇒10=1−MPC1
Step 3 — Solve for MPC
1−MPC=101=0.1⇒MPC=0.90
Why the other options are wrong
MPC values of 0.85, 0.75 or 0.95 correspond to multipliers of about 6.7, 4 and 20 respectively — none of which equals the actual multiplier of 10 implied by the data. …
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