The range of value of investment multiplier is always between _________ and _________.
The range of value of investment multiplier is always between _________ and _________.
Solution
Option 1 -> Incorrect. The multiplier cannot be zero as it equals 1/(1-MPC), and with MPC ranging from 0 to <1, the minimum value is 1, not 0.
Option 2 -> Correct. When MPC=0 (MPS=1), multiplier=1/1=1 (minimum). When MPC approaches 1 (MPS approaches 0), multiplier=1/(approaches 0)=∞ (maximum).
Option 3 -> Incorrect. The multiplier cannot be between 0 and 1, as the minimum value of the multiplier is 1, not less than 1.
Option 4 -> Incorrect. The multiplier cannot be negative in standard Keynesian economics since both MPC and MPS are positive fractions.
Hence, Option 2: one (+1); infinity (∞) -> The investment multiplier k = 1/(1-MPC) or k = 1/MPS. Since MPC ranges from 0 to less than 1, and MPS ranges from greater than 0 to 1, the multiplier has a minimum value of 1 (when MPS=1) and approaches infinity as MPS approaches 0. Therefore, the multiplier always lies between 1 and infinity. -> correct