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| 1. |
Explain the working of investment multiplier with the help of a numerical example |
| Answer» <html><body><p></p>Solution :<a href="https://interviewquestions.tuteehub.com/tag/investment-25469" style="font-weight:bold;" target="_blank" title="Click to know more about INVESTMENT">INVESTMENT</a> multiplier refers to <a href="https://interviewquestions.tuteehub.com/tag/increase-1040383" style="font-weight:bold;" target="_blank" title="Click to know more about INCREASE">INCREASE</a> in national income as a multiple of a given increase in investment. Its value is determined by Mrginal Propensity to Consume <br/> The value equals : <br/> Multiplier `= (1)/(1-<a href="https://interviewquestions.tuteehub.com/tag/mpc-548966" style="font-weight:bold;" target="_blank" title="Click to know more about MPC">MPC</a>) or (1)/(MPS)` <br/> Suppose increase in investment is Rs 1,000 and MPC = 0.8. The increase in national income is in the folloiwng sequence <br/> ** Increase in investment raises income of those who supply investment goods by Rs 1,000. This is first round increase <br/> ** 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. <br/> ** In the similar <a href="https://interviewquestions.tuteehub.com/tag/way-1450548" style="font-weight:bold;" target="_blank" title="Click to know more about WAY">WAY</a> 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. <br/> ** The total increase in income is Rs 5,000 which equal <br/> `Delta Y = Delta I xx (1)/(1-MPC)` <br/> `Delta Y = 1,000 xx (1)/(1 - 0.8) = Rs 5,000` <br/> (Working based on table is also <a href="https://interviewquestions.tuteehub.com/tag/correct-409949" style="font-weight:bold;" target="_blank" title="Click to know more about CORRECT">CORRECT</a> )</body></html> | |