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.
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=11−MPC⇒10=11−MPC
⇒ 1−MPC=110 ⇒ 10=11−MPC
⇒ MPC = 1 - 0.1 = 0.9
(i) Investment multiplier = 10
(ii) Marginal propensity to consume = 0.9