Question

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

Answer 1

We know,

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

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

Substituting the value of MPC, $\text{K}=\frac{\Delta \text{Y}}{\Delta \text{I}}$ and $\Delta \text{Y}=1,000$

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

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

Additional investment by the government $=\text{Rs.}500$