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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.

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Solution

Increase in income (ΔY)=10,000

Increase in investment expenditure (ΔI)=1,000

(i) We know,

Investment multiplier (M)=ΔYΔI=10,0001,000=10

(ii) We also know, M=11MPC10=11MPC

1MPC=110 10=11MPC

MPC = 1 - 0.1 = 0.9

(i) Investment multiplier = 10

(ii) Marginal propensity to consume = 0.9


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