Multiplier (investment multiplier) is a measure of the effect of change in initial investment on change in final income.
There exist a direct relation between MPC and multiplier. Higher the value of MPC, the higher is the value of multiplier.
Detailed Answer :
Multiplier is a measure of effect of change in investment on national income. It establishes relation between investment and income. It measures the change in income due to change in investment. The size of multiplier is determined by the Marginal Propensity to Consume. There is a direct relation between MPC and K. Higher the MPC, higher is value of K and vice-versa.
The relationship between the value multiplier and MPC is as follows :
The equation shows that the higher the value of MPC, the higher is the value of multiplier. The reason is that higher the expenditure on consumption, higher the increase in income of the producers of consumption goods and services.
The marginal propensity to consume (MPC), if the value of multiplier (K) is 4 will be :
