Question

Calculate the additional investment needed if the equilibrium level of income falls short by Rs. 1,000 crores. It is given that consumption function is given as: $C=120+0.8Y$ .

Answer 1

If MPC= 0.8, then

Multiplier(k) => 1,000 / change in investment = 1/ (1-MPC)

=> 1,000 / change in investment = 1/ (1- 0.8 )

=> 1,000 / change in investment = 1/ 0.2

=> 1,000 / change in investment = 5

=> change in investment = 1,000 / 5 = 2,00.

Hence, Rs. 200 investment is needed to make the income adequate.