Q. 175.0( 1 Vote )

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Answer :

Y = 300  C+I = 50

MPS = 0.2

MPC = 1-MPS

= 1- 0.2 = 0.8

AD = C+I  = C + bY + I

= 50 + (0.8*300)

= 50 + 240 = 290

OR

The investment multiplier shows the number of times the income will get multiplied with a small initial change in the investment. According to Keynes, when there is an increment of investment, income will be increased by an amount that is K times the increase in investment. Thus, K is the investment multiplier.

K= 1/1-MPC

When MPC = 4/5,

K = 1/(1-4/5)

= 5

When MPC = 1/2

K = 1/(1-1/2)

= 2

The value of the investment multiplier is determined by the value of Marginal Propensity to Consume (MPC). The size of the multiplier directly varies with the value of MPC. Higher the MPC, higher will be the size of the multiplier and vice-versa. When MPC is 4/5, the value of K is 5. When MPC is reduced to 1/2, the value of the multiplier also reduces to 2. Its value can range between 1 and infinity.

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