Question

What is the marginal propensity to invest? Explain if is it related to the marginal propensity to consume?

Answer 1

The Marginal Propensity to Investment is the ratio of change in investment to change in Income. It represents the proprotion of additional income that is invested in business process. The greater the part of the additional income is invested the greater would be the value of MPI.

Since the additional Income is either consumer, saved or Invested, MPI is closely related to MPC. The increase in income induces both consumption and investment. This thus results in a greater income in the next round, which in turn further induces more consumption and investment.

Both MPI and MPC determine the size of the expenditure multiplier.

Expenditure multiplier= 1/(1-(MPC+MPI))

Thus increase in both MPI and MPC increases the value of expenditure multiplier.