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Ques 20 both parts please

Q20. State whether the following statements are true false, give reasons for your answer

a) When marginal propensity to consume is greater then marginal propensity to save , the value of investment multiplied will be greater than 5

b) If the ratio of marginal propensity to consume & marginal propensity to save is 4: 1, the value of investment multiplier will be 4

The answer to part a) is False. This is because if MPC (say, 0.6) is greater than MPS (say 0.4), then the investment multiplier is:

$k=\frac{1}{1-MPC}=\frac{1}{1-0.6}=\frac{1}{0.4}=2.5$

which as you can see is less than 5. Hence, the statement is false.

Now, the answer to part b is also False. This is because if the ratio of MPC to MPS is 4:1, then MPC must be 0.8 and MPS must be 0.2. Using these values in the formula for multiplier we get,

$k=\frac{1}{1-MPC}=\frac{1}{1-0.8}=\frac{1}{0.2}=5$

So, we can see that multiplier is not 4, and thus, statement b) is false.

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