Question

If MPC and MPS are equal, what is the value of the multiplier?

Answer 1

We know that

MPS + MPC = 1

MPS + MPC = 1

∴ MPS = MPC

MPS = 1/2

K = 1/MPS

K = 2

Answer 2

MPC (Marginal  Property to Consume) and MPS (Marginal Property to Save) should always be equal to One. Hence only case where both will be equal is MPC and MPS being 0.5 each. The k value which denotes the value of multiplier is computed by the following formula:

k = 1/(1 - MPC).

In this case, given the value of MPC is 0.5, the k value will be 2. This (by the multiplier theory) means in layman terms that the national income will increase twice the initial investment or spending undertaken.