Determinants Of Multiplier
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Determinants of Multiplier
The size of multiplier depends upon: (i) the marginal propensity to consume (MPC), and (ii) marginal propensity to save (MPS).
Multiplier and Marginal Propensity to Consume
The size of multiplier 1/ 1-MPC depends upon the marginal propensity to consume (MPC).
There is a direct relationship between MPC and the size of multiplier. The larger, MPC, the larger is the multiplier, and vice versa.
The limits of MPC are zero and unity. We present the value of the multiplier at different levels of marginal propensity to consume.
Relation Between Marginal Propensity to Consume and Multiplier
Multiplier and Marginal Propensity to Consume
The size of multiplier 1/ 1-MPC depends upon the marginal propensity to consume (MPC).
There is a direct relationship between MPC and the size of multiplier. The larger, MPC, the larger is the multiplier, and vice versa.
The limits of MPC are zero and unity. We present the value of the multiplier at different levels of marginal propensity to consume.
Relation Between Marginal Propensity to Consume and Multiplier
| Value of MPC | Value of Multiplier, K =1- MPC |
| 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 |
∞ (infinity) 10.00 5.00 3.33 2.50 2.00 1.66 1.43 1.25 1.11 1.00 |
It will be seen from that if the economy decides to consume whole of its additional income (i.e., MPC = 1), multiplier is infinity. In this case even a small increment in investment will lead to an infinite increase in income. Such a possibility can, however, occur only during the exceptional circumstances like war and hyper-inflation.
On the other extreme, if the economy decides to save whole of its additional income (i.e., MPC = 0), multiplier is one. It shows that the income will increase only by an amount equivalent to an increase in investment, i.e, an additional investment of Rs. 100 crores will create an additional income of Rs. 100 crores only.
Thus, the multiplier, K, will be one when the marginal propensity to consume is zero and infinity when the marginal propensity to consume is one. These are two limiting cases of the multiplier. In actual practice, the marginal propensity to consume assumes values only between zero and one and, therefore, the multiplier, K, also assumes values only between one infinity.
Multiplier And Marginal Propensity To Save
We have seen above that the size of the multiplier varies directly with the size of the marginal propensity to consume. From this it follows that the size of the multiplier varies inversely with the marginal propensity to save:K = 1/ 1-MPC
We know that MPC + MPS = 1
MPS = 1-MPC
or K = 1/ MPS
If MPS = 0.3 K = 1/0.3 = 3.33.
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