Question

MPC = 0.75 and as a result of Multiplier Effect, National Income Increased by Rs. 300 crores by an additional investment of ________.

• A. Rs. 400 crores
• B. Rs. 225 crores
• C. Rs. 1200 acres
• D. Rs. 75 crores

Answer 1

Answer: (D)

Rs. 75 crores

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) => Change in income / change in investment = 1/ {1-MPC(c)} where c is the marginal propensity to consume

If MPC = 0.75 and change in income is Rs. 300 crores, then

Multiplier(k) => 300 / change in investment = 1/ {1-MPC(c)}

=> 300 / change in investment = 1/ 1- 0.75

=> 300 / change in investment = 1/ 0.25

=> 300 / change in investment = 4

=> change in investment = 300 / 4 = 75 crores rupees.

Therefore, additional investment is of Rs. 75 crores.