ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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You need either MPC or MPS to help you find the multipler
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You need MPC not MPS to help you find the multiplier
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You need MPS not MPC to help you find the multiplier
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You don’t need either to help you find the multiplier
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Detailed explanation-1: -Higher the value of MPS the smaller will be the value of multiplier and lower the value of MPS; the larger will be the value of multiplier. Relationship between multiplier and MPCSince K = 1 / 1-MPC so the value of multiplier varies directly with the value of MPC.
Detailed explanation-2: -For a maximum value of MPC, there is a maximum value of multiplier (infinity) For a minimum value of MPC (0), there is a minimum value of multiplier (1). As the MPC increases, there is also an increase in the multiplier and vice-versa. Therefore, there is a positive relationship between MPC and multiplier.
Detailed explanation-3: -Mathematical Relationship between MPC and MPS! The sum of MPC and MPS is equal to unity (i.e., MPC + MPS = 1). For sake of convenience, suppose a man’s income Increases by Rs 1. If out of it, he spends 70 paise on consumption (i.e., MPC = 0.7) and saves 30 paise (i.e., MPS = 0 3) then MPC + MPS = 0.7 + 0.3 = 1.