Question

In an economy, the government makes some additional investment. Find its value when MPC = 0.5 and increase in income = Rs 1,000.

• A. Rs 500
• B. Rs 1,000
• C. Rs 1,500
• D. Rs 100

Answer 1

The correct option is A

Rs 500

We know,

M (multiplier) $=\frac{\Delta Y}{\Delta I}$

We also know that, $K=\frac{1}{1-MPC}$

Substituting the value of MPC, $K=\frac{1}{1-0.5}=\frac{1}{0.5}=2$

We know, $K=\frac{\Delta Y}{\Delta I}$ and $\Delta Y=1,000$

Thus, $\frac{1,000}{\Delta I}=2$

$\therefore$ $\Delta I=\frac{1,000}{2}=500$

Additional investment by the government = Rs 500.