What will be the change in income when change in investment is Rs 2,000 and MPC is 0.85?
Answer & explanation
Correct answer: option 4
The correct answer is option 4: 13,333
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 = \(\frac{1}{\text{1-MPC}}\)
So,
\(\frac{1}{\text{1-MPC}}\) = \(\frac{ΔY}{ΔI}\)
\(\frac{1}{\text{1-0.85}}\) = \(\frac{ΔY}{2,000}\)
\(\frac{1}{\text{0.15}}\) = \(\frac{ΔY}{2,000}\)
ΔY = \(\frac{100}{\text{15}}\) * 2000
ΔY = 13,333