What will be the value of investment multiplier and change in final income when change in investments is Rs 500 crore and MPS is 0.3?
Answer & explanation
Correct answer: option 4
The correct answer is option 4: Investment multiplier = 3.33 and change in final income = Rs 1,667 crore
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 = \(\frac{1}{\text{1 - MPC}}\)
K = \(\frac{1}{\text{MPS}}\)
K = \(\frac{1}{\text{0.3}}\)
K = \(\frac{10}{\text{3}}\)
K = 3.33
Also,
K = \(\frac{ΔY}{ΔI}\)
\(\frac{10}{3}\) = \(\frac{ΔY}{500}\)
ΔY = \(\frac{10}{3}\) * 500
ΔY = \(\frac{5000}{3}\)
ΔY = 1667