Question

in an economy the increase in income is 5 times increase in investment expenditure calculate the value of MPC

Answer 1

Assuming

Increase in Income = ΔY

Increase in Investment expenditure = ΔI

We know that ΔY/ΔI = K [ where K denotes the investment multiplier]

It is given that ΔY = 5 (ΔI)

By solving the equation, we see that

ΔY/ΔI = 5

Hence investment multiplier is = 5

Another formula for investment multiplier that is required in this question is

K = 1 / 1- MPC

By equating both the above equations, we find that

5 = 1 / 1- MPC

Therefore ,

1 = 5 - 5(MPC)

Hence ,

MPC = 4/5 = 0.8

Answer :     MPC= 0.8