What is the formula representing the relationship between the Marginal Propensity to Consume (MPC) and the Multiplier (K)?

The formula that captures the relationship between the Marginal Propensity to Consume (MPC) and the Multiplier (K) is derived from the basic principles of Keynesian economics. The correct expression, K = 1 ÷ (1 - MPC), signifies that the multiplier effect is influenced by how much of an additional income will be consumed.

When individuals receive additional income, they spend a certain fraction of it according to the MPC, which represents the proportion of each additional dollar of income that is consumed rather than saved. The remaining income is saved. This fraction thus determines the size of the multiplier. If the MPC is higher, more of the additional income is spent, leading to a larger multiplier effect. Conversely, a lower MPC means more is saved, resulting in a smaller multiplier.

The logic behind the formula shows that as the MPC approaches 1, the multiplier increases, reflecting the increased spending that occurs with each round of income generation. Therefore, the correct relationship encapsulated in the formula signifies how the MPC directly influences economic growth through its effect on the multiplier.