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Assuming that increase in investment is 1000 crore and marginal propensity to consume is 0.9, explain the working of multiplier. |
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Answer» Solution :Remember multiplier works through consumption i.e., consumption expenditure of one person is other person's income. For example expenditure of A is income of B, B's expenditure is income of C and so on until expenditure BECOMES nil. In the above question increase in investment `(DeltaI)` is? 1000 and MPC = 0.9 or 9/10. Income increases in the foUowing sequence. Round 1 : first impact of investment of Rs 1000 rises income by Rs 1000 of those who supply (produce) goods. Round 2 : Since MPC = 0.9, income earners spends on consumption Rs 900 (= 9/10 of 1000) lending to income increase of Rs 900. Round 3: Income earners SPEND Rs 810 (9/10 of 900) on consumption lending to THIRD round of income increase of Rs 810. In similar way income goes on increasing round after round with each round increasing by 9/10 of PREVIOUS round. Thus, total increase in income is : `K=(DeltaY)/(Delta I)or DeltaY=KxxDeltaI=DeltaIxx(1)/(1-MPC)` `DeltaY=DeltaIxx(1)/(1-MPC)` `1000xx(1)/(1-0.9)=1000xx(1)/(1//10)=1000" crore"` |
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