Define 'Multiplier'.

Question 21 of 37

Q. Define 'Multiplier'.

Puducherry TnboardTamil Nadu HSC (DGE) Commerce Board 2023Subjective· 2mImportance★★★★★

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The multiplier K = ΔY/ΔI = 1/(1 - MPC) = 1/MPS; it measures the multiplied effect of a change in investment on national income.

In the multiplier topic of the Tamil Nadu HSC Commerce syllabus, the concept of the investment multiplier was developed by R.F. Kahn and popularised by J.M. Keynes.

The multiplier (K) is defined as the ratio of the change in national income to the change in investment that caused it:

K = Change in income / Change in investment = ΔY / ΔI

Its value depends on the marginal propensity to consume (MPC):

K = 1 / (1 - MPC) = 1 / MPS

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

CA Foundation 2026Set may-20261 markMCQ
$Q. There is an increase in the national income by ₹ 2,000 crores when there is an increase in investments by ₹ 1,600 crores. Calculate the marginal propensity to consume. (A) 0.80 (B) 0.50 (C) 0.20 (D) 0.40$
›Reveal solutionSolution

Multiplier k = ΔY/ΔI = 1.25 ⇒ MPC = 1 − 1/k = 0.20.

Step 1 — Find the multiplier
$k = \frac{\Delta Y}{\Delta I} = \frac{2000}{1600} = 1.25$
Step 2 — Relate the multiplier to MPC
$k = \frac{1}{1-\text{MPC}}$
Step 3 — Solve for MPC
$1.25 = \frac{1}{1-\text{MPC}}$ $1-\text{MPC} = \frac{1}{1.25} = 0.8$ $\text{MPC} = 1 - 0.8 = 0.20$
Step 4 — Eliminate the others …
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CA Foundation 2026Set may-20261 markMCQ
$Q. Which of the following statements correctly explains the relationship between Marginal Propensity to Consume (MPC), Marginal Propensity to Save (MPS), and the value of the investment multiplier? (A) Higher the MPC more will be the value of investment multiplier (B) Higher the MPS more will be the value of investment multiplier (C) Lower the MPC more will be the value of investment multiplier (D) Lower the MPS less will be the value of investment multiplier$
›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
$k = \dfrac{1}{1 - MPC} = \dfrac{1}{MPS}$
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 …
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CA Foundation 2025Set jan-20251 markMCQ
$Q. In an economy investment expenditure is increased by ₹ 300 crores and marginal propensity to consume is 0.6. Calculate the total increase in income. (A) ₹ 300 crores (B) ₹ 100 crores (C) ₹ 650 crores (D) ₹ 750 crores$
›Reveal solutionSolution
$k = \frac{1}{1-MPC} = 2.5$ , so $\Delta Y = k \times \Delta I = 2.5 \times 300 = 750$ crores.

Step 1 — The multiplier formula

The investment multiplier links a change in investment to the eventual change in income:
$k = \frac{1}{1 - MPC} = \frac{1}{MPS}$
Step 2 — Compute the multiplier
$k = \frac{1}{1 - 0.6} = \frac{1}{0.4} = 2.5$
Step 3 — Apply it to the investment change
$\Delta Y = k \times \Delta I = 2.5 \times 300 = 750 \text{ crores}$
Why the other options are wrong

(A) ₹300 crores ignores the multiplier (assumes k = 1).

(B) ₹100 crores has no valid derivation. …
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CA Foundation 2025Set jan-20251 markMCQ
$Q. The investment multiplier is defined as the ratio of : (A) change in investment due to change in saving (B) change in demand due to change in investment (C) change in consumption due to change in investment (D) change in national income due to change in investment$
›Reveal solutionSolution
The investment multiplier is $k = \dfrac{\Delta Y}{\Delta I}$ — 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:
$k = \frac{\Delta Y}{\Delta I} = \frac{1}{1 - MPC}$
Step 2 — Read the ratio correctly

Income ( $\Delta Y$ ) is on top, investment ( $\Delta I$ ) 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. …
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CA Foundation 2025Set sep-20251 markMCQ
$Q. The maximum value of investment multiplier will be the infinity when the value of : (A) MPC is 1. (B) MPC is -1. (C) APC is 1. (D) MPS is -1.$
›Reveal solutionSolution
$k=1/(1-\text{MPC})$ is infinite when $1-\text{MPC}=0$ , i.e. MPC = 1.

Step 1 — The multiplier formula
$k = \frac{1}{1-\text{MPC}} = \frac{1}{\text{MPS}}$
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:
$1-\text{MPC}=0 \;\Rightarrow\; \text{MPC}=1 \;\Rightarrow\; \text{MPS}=0$
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. …
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CA Foundation 2025Set sep-20251 markMCQ
$Q. If national income increases from ₹ 500 crores to ₹ 2,500 crores due to an increase in investment of ₹ 200 crores, what will be the value of the Marginal Propensity to Consume (MPC) ? (A) 0.90 (B) 0.85 (C) 0.75 (D) 0.95$
›Reveal solutionSolution

$k=\Delta Y/\Delta I = 2000/200 = 10 = 1/(1-\text{MPC})$ ⇒ MPC = 0.90.

Step 1 — Find the multiplier
$k=\frac{\Delta Y}{\Delta I}=\frac{2{,}500-500}{200}=\frac{2{,}000}{200}=10$
Step 2 — Link the multiplier to MPC
$k=\frac{1}{1-\text{MPC}} \;\Rightarrow\; 10=\frac{1}{1-\text{MPC}}$
Step 3 — Solve for MPC
$1-\text{MPC}=\frac{1}{10}=0.1 \;\Rightarrow\; \text{MPC}=0.90$
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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←Previous questionQ12 — The Multiplier is calculated as ____. (a) 1/(1 - MPC) (b) 1/MPS (c) 1/…→Next questionQ14 — Differentiate between Autonomous and Induced investment.

Q.Define 'Multiplier'.

Concept understanding — The Investment Multiplier

The formula

How and why it works

Worked illustration

Key relationships

Step 1 — Find the multiplier

Step 2 — Relate the multiplier to MPC

Step 3 — Solve for MPC

Step 4 — Eliminate the others …

Step 1 — State the multiplier formula

Step 2 — See how k responds to MPC and MPS

Step 3 — Test each statement

Step 4 — Numerical check …

Step 1 — The multiplier formula

Step 2 — Compute the multiplier

Step 3 — Apply it to the investment change

Why the other options are wrong

Step 1 — Definition

Step 2 — Read the ratio correctly

Step 3 — Why the other options are wrong

Step 1 — The multiplier formula

Step 2 — When does it become infinite?

Why the other options are wrong

Step 1 — Find the multiplier

Step 2 — Link the multiplier to MPC

Step 3 — Solve for MPC

Why the other options are wrong

Q.Define 'Multiplier'.

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