If MPS is 0.10 and investment increases by Rs500 crs what is increase in income?
Answers
Answer:
Answer: As given in the examination problem, Equilibrium Income (Y) = Rs 4000 crore Autonomous Investment + Autonomous Consumption (A¯) = Rs 50 crore MPS = 0.2
So, MPC(b) = 1 – 0.2 = 0.8
(MPC = 1 – MPS)
AD = C + I
AD = C¯ + bY + I = A¯ + bY
= 50 + 0.8Y (A¯=C¯+I¯)
As we know, the equilibrium level of national income in two-sector model is determined where,
AS = AD
Y = 50 + 0.8Y
4000 = 50 + 0.8(4000)
4000 = 50 + 3200
4000 =3250
Hence, the economy is not in equilibrium
Answer:
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/ MPS(s) where s is the marginal propensity to save.
If MPS= 0.20 and change in investment is by Rs. 400 crores, then
Multiplier(k) => Change in income / change in investment = 1/ MPS
=> change in income/ 400 = 1/0.20
=> change in income/ 400 = 5
=> change in income = 5 * 400 = 2000 crores.
Therefore, Income is increased by Rs. 2000 crores.