Question

explain the working of multiplier calculate the value of multiplier and change in income when change in investment in the economy is ₹ 100 crore and the MPC is 0.8​

Answer 1

Value of multiplier = 5

Change in income = Rs. 500 crores

Explanation:

Given: MPC is 0.8. Increase in investment is Rs. 100 crores.

MPC means Marginal Propensity to Consume. For every Rs. 1 invested, Rs. 0.80 is consumed. So savings is Rs. 0.20. Saving 20% of your income means it would yield a multiplier of 5.

Multiplier value depends on the amount of additional money spent on the domestic economy. We have a high MPC when people invest a high percentage of their extra money, which results in a major multiplier impact. When money is removed from circulation, however, then the multiplier effect would be very small.

Now, we have a multiplier of 5 and an investment of Rs. 100 crores.

So the national income will increase by 5 * 100 = Rs. 500 crores