Why investment multiplier is indirectly related with MPS?
Dear Student
When the investment increases, productivity capacity also increases which in turn raises the level of output, employment and income.
As a result of this aggregate income income by multiple times than the investment. This whole process is called investment multiplier which shows the relation between initial investment and the increment in total national income.
MPS refers to the proportion of additional income that goes to saving. It is measured as the ratio between change in saving and change in income.
Investment multiplies is denoted by K
K = 1 / MPS
This implies multiplies is inversely proportional to MPS. Which means higher the MPS lower the multiplier and lower the MPS higher the multiplier.
This is because with the each round of increase in savings, investment by the people in the market will decrease which will in turn decrease the multiplier.
Regards
When the investment increases, productivity capacity also increases which in turn raises the level of output, employment and income.
As a result of this aggregate income income by multiple times than the investment. This whole process is called investment multiplier which shows the relation between initial investment and the increment in total national income.
MPS refers to the proportion of additional income that goes to saving. It is measured as the ratio between change in saving and change in income.
Investment multiplies is denoted by K
K = 1 / MPS
This implies multiplies is inversely proportional to MPS. Which means higher the MPS lower the multiplier and lower the MPS higher the multiplier.
This is because with the each round of increase in savings, investment by the people in the market will decrease which will in turn decrease the multiplier.
Regards