Question

Describe the graphical representation of investment multiplier.

OR

If a change in investment of Rs. 100 crores is required to bring a change in income by Rs. 1000 crores, calculate MPC and MPS.

Answer 1

Graphical representation of multiplier:
The working of the multiplier can be shown with the help of the following diagram:

In the graph, AD = C+I is aggregate demand curve, intersecting the AS curve at the point E. Due to the additional investment $\left(\Delta I\right)$, AD curve shifts to $A{D}^{\prime }=C+I+\Delta I$ giving new equilibrium level of income $O{Y}_1$ showing the effect of the multiplier. The income increases by $Y{Y}_1$.

OR

$K=\frac{\Delta Y}{\Delta I}=\frac{1000}{100}=10$

Or $10=\frac{1}{1-MPC}$

Or $10(1-MPC)=1$

MPC = 0.9 and MPS = 0.1