Question

From the following data, calculate investment multiplier and equilibrium level income in the economy. 

1. Change in initial investment (ΔI) = ₹ 1,000 crore
2. Marginal Propensity to Save (MPS) = 0.5
3. Autonomous consumption (`barc`) = ₹ 50 crore
4. Planned investment = ₹ 100 crore 

Answer 1

MPC = 1 − MPS = 1 − 0.5 = 0.5

Y = C + I

Y = (50 + 0.5Y) + 100

Y − 0.5 Y = 150

Y = `150/0.5` 

= ₹ 300 crores

Investment multiplier = `1/(MPS)`

= `1/0.5`

= 2