Assuming that increase in investment is Rs. 1000 crore and marginal propensity to consume is 0.9, explain the working of multiplier.

Question

Philoid · Accepted Answer

Investment multiplier (K) = Change in Income/Change in Investment

Or

K = 1/ 1- MPC

So, if MPC = 0 9.,

K = 1/ 1- 0.9 = 1/0.1 = 10

Now, if the investment increases by Rs. 1000 crores, then increase in income can be computed by substituting the values in the following formula

Investment multiplier (K) = Change in Income/Change in Investment

10 = Change in Income /1000

Change in Income = Rs. 10000 crores

So, if investment increases by Rs. 1000 crores and MPC = 0.9, then income will increase by Rs. 10000 crores.