What will be the value of MPS when increase of Rs 20,000 in investment in an economy results in increase in income of Rs 48,000?
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: 0.41
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 = \(\frac{1}{\text{1-MPC}}\) = \(\frac{1}{\text{MPS}}\)
So,
\(\frac{1}{\text{MPS}}\) = \(\frac{ΔY}{ΔI}\)
\(\frac{1}{\text{MPS}}\) = \(\frac{48,000}{20,000}\)
MPS = \(\frac{20,000}{48,000}\)
MPS = 0.41