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If MPC = 0.75, how much …

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If MPC = 0.75, how much additional investment is required to increase income by 600? Also, find Multiplier (K).
  • 1 answers

Gaurav Seth 4 years, 10 months ago

 

Investment multiplier refers to the number of time by which the increase in output or income exceeds the increase in investment. It is measured as the ratio between change in income and change in investment and it is denoted as 'k'.

Multiplier(k) => Change in income / change in investment = 1/ {1-MPC(c)} where c is the marginal propensity to consume

If MPC = 0.75 and change in income is Rs. 600 crores, then

Multiplier(k) => 600 / change in investment = 1/ {1-MPC(c)}

                     => 600 change in investment  = 1/ 1- 0.75

                     => 600 change in investment  = 1/ 0.25

                     =>  600 / change in investment  = 4

 

                     => change in investment = 600 / 4  = 150 crores rupees.

 

Therefore, additional investment is of Rs. 150 crores. 

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