The correct option is 1 and 3 only.
Explanation
The investment multiplier is a central concept in Keynesian macroeconomics. It quantifies the relationship between an initial increase in autonomous expenditure (such as investment) and the resulting larger increase in the aggregate equilibrium output (income) of an economy.
Statement-wise Analysis:
- Statement 1 is Correct. The investment multiplier is defined as the ratio of the change in equilibrium output ($\Delta Y$) to the initial change in autonomous expenditure ($\Delta I$). It explains how an initial injection of investment leads to a multiple increase in national income.
- Statement 2 is Incorrect. The value of the investment multiplier ($k$) is calculated using the formula:
$k = \frac{1}{MPS}$
Where MPS is the Marginal Propensity to Save. Since MPS is in the denominator, the value of the multiplier is inversely proportional to the MPS. A higher propensity to save acts as a leakage from the circular flow of income, thereby reducing the multiplier effect. - Statement 3 is Correct. The relationship between the multiplier and the Marginal Propensity to Consume (MPC) is given by:
$k = \frac{1}{1 - MPC}$
If MPC is zero (meaning no part of the additional income is consumed), the formula becomes:
$k = \frac{1}{1 - 0} = 1$
In this scenario, the total increase in income is exactly equal to the initial increase in investment, as there is no induced consumption to generate further rounds of income.
Key Takeaway:
The size of the investment multiplier is determined by the Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS). It is directly related to MPC ($k = \frac{1}{1-MPC}$) and inversely related to MPS ($k = \frac{1}{MPS}$).