Question

The government makes an additional investment of when MPC = 0.5 and the increase in income is 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) = $\frac{\Delta Y}{\Delta I}$
K = $\frac{1}{1-\mathrm{MPC}}$

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

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

Thus, $\frac{1000}{\Delta I}$= 2
Therefore, $\Delta I$= 500
Additional investment by the government = Rs 500