Question : Assertion: A higher value of MPC, the higher the value of the investment Multiplier.
Reason: Investment Multiplier is directly related to MPS.
Option 1: Both Assertion and Reason are correct, and the Reason is the correct explanation of the Assertion.
Option 2: Both Assertion and Reason are correct, but the Reason is NOT the correct explanation of the Assertion.
Option 3: Assertion is correct, but the Reason is incorrect.
Option 4: Assertion is incorrect, but the reason is correct
Correct Answer: Assertion is correct, but the Reason is incorrect.
Solution : The correct answer is (C) Assertion is correct, but the Reason is incorrect.
The Assertion that a higher value of MPC (Marginal Propensity to Consume) leads to a higher value of the investment multiplier is correct. The investment multiplier is a concept in economics that measures the overall impact of changes in investment on the total level of economic activity.
When the MPC is higher, it means that a larger proportion of additional income is spent on consumption. This higher propensity to consume leads to a greater multiplier effect, as each additional unit of investment spending has a larger impact on aggregate demand and income.
However, the Reason provided is incorrect. The investment multiplier is not directly related to MPS (Marginal Propensity to Save), as stated in the Reason. The investment multiplier is determined by the formula:
Investment Multiplier = 1 / (1 - MPC)
The investment multiplier is inversely related to the marginal propensity to save, not directly related. The higher the marginal propensity to save (MPS), the smaller the value of the investment multiplier.
Therefore, the Assertion is correct in stating that a higher value of MPC leads to a higher value of the investment multiplier. However, the Reason is incorrect in claiming a direct relationship between the investment multiplier and MPS.
