Question

In an economy income increases by 10,000 as a result of a rise in investment expenditure by 1,000. Calculate

(i) Investment multiplier.

(ii) Marginal propensity to consume.

Answer 1

Increase in income $\left(\Delta Y\right)=10,000$

Increase in investment expenditure $\left(\Delta I\right)=1,000$

(i) We know,

Investment multiplier $\left(M\right)=\frac{\Delta Y}{\Delta I}=\frac{10,000}{1,000}=10$

(ii) We also know, $M=\frac{1}{1-MPC}\Rightarrow 10=\frac{1}{1-MPC}$

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

$\Rightarrow$ MPC = 1 - 0.1 = 0.9

(i) Investment multiplier = 10

(ii) Marginal propensity to consume = 0.9