Question

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

(a) Investment Multiplier

(b) Marginal Propensity to Consume

OR

Differentiate between full employment equilibrium and under employment equilibrium with the help of a diagram.

Answer 1

(a) Investment Multiplier = $\frac{\Delta Y}{\Delta I}=\frac{10000}{1000}=10$

(b) MPC

K (Multiplier) = $\frac{1}{1-MPC}or10=\frac{1}{1-MPC}$

MPC=0.9

OR

$\begin{array}{cc}\text{Full employment equilibrium}& \text{Under employment equilibrium}\\ \text{When AD equals AS such that resources}& \text{When AD equals AS such that resources are not}\\ \text{are fully employed, the economy achieves}& \text{fully employed or before the full employment level.}\\ \text{full employment equilibrium.}& \\ \text{At this point, there is no involuntary}& \text{At this point, there is involuntary unemployment}\\ \text{unemployment in the economy.}& \text{in the economy.}\end{array}$