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.
K=ΔY/ΔI =Change in Income / Change in Investment
The relationship between the value multiplier and
MPC is as follows :
K=1/1-MPC
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 consumer goods and services.
The marginal propensity to consume (MPC), if the value of multiplier (K) is a will be :
K=1/1-MPC
=> 4=1/1-MPC
=> 1-MPC=1/4
=>MPC=1-1/4
=>MPC=0.75.
