What will be the change in final income, when MPC = 0.6 and change in initial investment is Rs. 2,000 crore?
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: 5,000
Investment multiplier refers to the increase in the aggregate income of the economy as a result of an increase in the investments done by the government. The ratio of ΔY to ΔI is called the investment multiplier.
K = \(\frac{ΔY}{ΔI}\)
K = \(\frac{1}{\text{1-MPC}}\)
K = \(\frac{1}{1-0.6}\)
K = \(\frac{1}{0.4}\)
K = 2.5
Now, we know that K = 2.5 and change in initial investment is Rs. 2,000 crore
So,
K = \(\frac{ΔY}{ΔI}\)
2.5 = \(\frac{ΔY}{2,000}\)
ΔY = 5,000