Question

How are the MPC and the multiplier different from and similar to each other?

Answer 1

MPC is Marginal Propensity to Consume. MPC is that part of a household's extra income which is used for expenditures and consumption. If we say that MPC is 55% then it means that for each additional dollar which is earned, 55 cents are spent. MPC = change in consumption/change in income

Multiplier is the increase in income caused by an increase in the investment in the economy.

MPC and multiplier are similar to each other because it the value of MPC increases, the value of multiplier increases and viceversa.

Multiplier = 1/(1-MPC)

The difference between MPC and multiplier is that:

MPC is the increase in consumption caused by a one unit increase in the income of a person/economy.

Whereas multiplier is the increase in the income caused by an increase in the investment in the economy.