Question

The consumption function in an economy is C = 80 + 0.6Y and investment level in an economy is 800 crores. State whether the following are true or false:
(a) Equilibrium level of income is 2100 crores.
(b) 275 crores is the total change in income if investment rises by 150 crores.
(c) Value of multiplier is 2.5.

Answer 1

C = 80 + 0.6Y
(a) False,
(a) At equilibrium level, AD = AS
C + I = Y
80 + 0.6Y + 800 = Y
Y = 2200
(b) False,
Change in Investment = 150 crores
K (Multiplier) = $\frac{1}{1-MPC}$
= $\frac{1}{1-0.6}$ = 2.5
K = $\frac{△Y}{△I}$

2.5 = $\frac{△Y}{150}$

$△Y$ = 375

(c) True,
K = 2.5