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When economy decides to save the whole of its additional income, then value of investmentmultiplier will be

Question

When economy decides to save the whole of its additional income, then value of investment multiplier will be

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Solution

The value of the investment multiplier will be 1.

Here's the step-by-step explanation:

  1. The investment multiplier is a concept in Keynesian economics that measures the impact of a change in investment on total income. It is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume.

  2. If an economy decides to save all of its additional income, then the marginal propensity to consume (MPC) is zero. This is because none of the additional income is being spent; it's all being saved.

  3. Substituting MPC = 0 into the formula for the investment multiplier gives 1/(1-0) = 1.

So, when an economy decides to save all of its additional income, the value of the investment multiplier is 1. This means that a change in investment will have a one-for-one impact on total income.

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