Question

If in an economy :
Change in initial Investments (∆I) = ₹ 500 crores
Marginal Propensity to Save (MPS) = 0.2

Find the values of the following:

(a) Investment multiplier (k),

(b) Change in final income (∆Y)

Answer 1

(a) We, Know,

`"k" = (1)/"MPS" =(1)/(0.2) = 5`

So, investment multiplier is 5.

(b) We also Know,

`"k" = (Δ"Y")/(Δ"I")`

5 = `(Δ"Y")/(500)`

ΔY = 2,500.