question_answer

Assuming that increase in investment is Rs. 1000 crore and marginal property to consume is 0.9. Explain the working of multiplier.

Answer:

Increase in investment = Rs. 900 crore
Marginal propensity to consume =0.6
Multiplier (K) is the ratio of increase in national Income (\[\Delta Y\]) due to increase in investment (\[\Delta I\]).
\[K=\frac{\Delta Y}{\Delta I}\]
Round 1	Increasein Investment	Increasein Income	Increasein Consumption
1	900	900	540
2	900	540	374
3	900	374	224.4
4	900	224.4	?
5	?	?	?
?	?	?	?
?	?	?	?
?	?	?	?
?	?	?	?
Increase in consumption = \[\frac{900\,\,\times \,\,0.6}{10}\]
= 540
=\[\frac{540\,\,\times \,\,0.6}{10}\]
= 374
=\[\frac{374\,\,\times \,\,0.6}{10}\]
= 224.4