Q17 of 25 Page 1

Discuss briefly the relationship between marginal propensity to save and investment multiplier, using a hypothetical numerical example.

OR


State the meaning of the following :


(i) Full employment


(ii) Involuntary unemployment


There exists an inverse relationship between the marginal propensity to save and investment multiplier.

K = 1/MPS


The higher the value of the marginal propensity to save, the lower is the value of investment multiplier.


For example, the value of the marginal propensity to save falls from 0.7 to 0.5, the value of investment multiplier will increase from 2 to 5.


OR


(i) Full employment- Full employment is a situation of no involuntary unemployment.


(ii) Involuntary unemployment- Involuntary unemployment is a situation when a person who is willing and able to work is unable to find work.


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