Q.'Investment multiplier and Marginal Propensity to Consume are directly related to each other.' Explain with the help of numerical example.

The investment multiplier $k$ is defined as $k = \frac{1}{1 - c}$, where $c$ is the marginal propensity to consume (MPC). This formula reveals a direct relationship: as MPC rises, the denominator $(1 - c)$ shrinks, making the multiplier larger.

Numerical example: Suppose initially MPC $c = 0.5$. Then the multiplier is

Now let MPC increase to $c = 0.8$. The multiplier becomes

$k = \frac{1}{1 - 0.8} = \frac{1}{0.2} = 5$ …

The investment multiplier tells us by how much national income will ultimately increase when autonomous investment rises by one rupee. It captures the idea that the initial spending doesn't just stop with the first recipient—that person spends part of it, creating income for someone else, who spends part of that, and so on in successive rounds.

The size of this multiplier depends entirely on the Marginal Propensity to Consume, the fraction of an additional rupee of income that households choose to spend rather than save. When MPC is high, each recipient passes on a large share of the income they receive, so the chain of spending is long and strong. When MPC is low, more leaks out into savings at each step, and the multiplier effect fizzles quickly.

where $k$ is the investment multiplier and $\text{MPS} = 1 - \text{MPC}$ is the Marginal Propensity to Save.

This formula makes the direct relationship transparent: as MPC approaches 1, the denominator $(1 - \text{MPC})$ shrinks toward zero, and the multiplier grows large. Conversely, a low MPC (high MPS) keeps the denominator large and the multiplier small.

Numerical illustration

Suppose autonomous investment increases by ₹100 crore. Consider three scenarios with different values of MPC.

When MPC is 0.5, half of every rupee received is saved, so the spending chain dies out relatively fast—the multiplier is only 2, and the ₹100 crore investment raises income by ₹200 crore in total.

Raise MPC to 0.75, and now three-quarters of each rupee circulates onward. The multiplier doubles to 4, and the same ₹100 crore injection generates ₹400 crore of income. …