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Explain the working of investment multiplier with the help of a numerical example |
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Answer» Solution :INVESTMENT multiplier refers to INCREASE in national income as a multiple of a given increase in investment. Its value is determined by Mrginal Propensity to Consume The value equals : Multiplier `= (1)/(1-MPC) or (1)/(MPS)` Suppose increase in investment is Rs 1,000 and MPC = 0.8. The increase in national income is in the folloiwng sequence ** Increase in investment raises income of those who supply investment goods by Rs 1,000. This is first round increase ** Since MPC = 0.8, the income earners speed Rs 800 on consumption. This raises the income of the suppliers of consumption goods by Rs 800. This is second round increase. ** In the similar WAY the third round increase is Rs `640 = 800 xx 8`. In this way national income goes on national income goes on increasing round after round. ** The total increase in income is Rs 5,000 which equal `Delta Y = Delta I xx (1)/(1-MPC)` `Delta Y = 1,000 xx (1)/(1 - 0.8) = Rs 5,000` (Working based on table is also CORRECT ) |
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