ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Multiplier (k) = 1/MPS = 1/ 0.5 = 2.

Detailed explanation-2: -The value of MPC is equal to unity (i.e., 1) when MPS is zero since whole of disposable income is spent on consumption. Again, value of MPC cannot he greater than 1 because change in consumption (i.e., additional consumption) cannot be more than change in income (i.e., additional income).

Detailed explanation-3: -The factor 1/(1 − MPC) is called the multiplier. If a question tells you that the multiplier is 2.5, that means: Change in GDP = 2.5 × Change in AD. 1. If your consumption increases from $30, 000/yr to $40, 000/yr when your disposable income increases from $84, 000 to $96, 500/yr, calculate your MPC.

Detailed explanation-4: -MPS + MPC = 1 Since income is equal to the summation of consumption and saving, change in income also equals the sum of the change in consumption and change in saving. Therefore, the sum of MPC and MPS is equal to one.

Detailed explanation-5: -An MPC equal to one means that a change in income (∆Y) led to the same proportionate change in consumption (∆C). That is, a person spent 100% of the additional income on goods and services and saved none of it. An MPC less than one means that a change in income produced a proportionally smaller change in consumption.