Which of the following must be true to have a closed economy with no government, and yet the value of the investmet multiplier still increase?
A. Marginal propensity to save has fallen B. Actual investment had fallen C. Average propensity to invest has fallen D. Actual saving has fallen
Correct Answer: A
Explanation
Investment multiplier (K) is a function of two factors; The MPS and MPC. If MPC is high, K will also be high but if MPC is low, K will also be low. on the other hand, If MPS is high, K will be low and if MPS is low, K will be high ( since there is an inverse relationship between MPS and K).
