Relation between Investment Multiplier K and MPC
PRACTICAL QUESTIONS
Example 1.
Calculate multiplier if MPC is:
(i) 0.75;
(ii) 0.90.
View answer
Calculate K
(i)
MPC = 0.75
K = 1/1 - MPC
K = 1/ 1 - 0.75
K = 1/ 0.25
K = 4
(ii)
MPC = 0.9
K = 1/1 - MPC
K = 1/ 1 - 0.9
K = 1/ 0.1
K = 10
Example 3.
In an economy, income generated is four times the increase in investment expenditure. Calculate the values of MPC and MPS.
View answer
We know that
K = Investment Multiplier = Change in Income/Change in Investment
In this question,
Income Generated is 4 Times Change in Investment Expenditure
It means
Increase in Income/Change in Investment = 4
K = 4
Now, we know that
Now, these K and MPC are related as follows
K = 1/1-MPC
4 = 1/1-MPC
4 - 4 MPC=1
- 4 MPC=1-4
- 4 MPC=-3
MPC = - 3 / - 4
MPC = 34 = 0.75
Now, we have to calculate MPS
We know that
MPC + MPS = 1
0.75 + MPS = 1
MPS=1-0.75=0.25
Example 4.
In an economy, the marginal propensity to consume is 0.8. If the investment increases by ₹ 1,000 crores, calculate the total increase in income.
View answer
MPC = 0.8
Change in Investment = 1000
K = 1/1 - MPC
K = 1/1 - 0.8
K = 1/ 0.2
K = 5
Also,
K = Change in Income/ Change in Investment
5 = Change in Income/ 1000
Change in Income = 5000
Example 5.
In an economy, 60% of increased income is spent on consumption. If ₹ 4 crores invested in a project, find out the increase in income and saving.
View answer
In this question, it is given that
60% of Increased Income is spent on Consumption
It means,
Change in Consumption/Change in Income=60%=0.6
MPC=0.6
Now ,we know that
K = 1/1-MPC
K = 1/1-0.6
K = 1/0.4
K = 1*10/4
K = 2.5
Now, we know that k is Investment Multiplier whose formula is
k = Change in Income/Change in Investment
2.5 = Change in Income/4
Change in Income=2.5*4=10
Now, we need to calculate Change in Savings
For this, we first need to calculate MPS
MPC+MPS=1
MPS + 0.6 = 1
MPS = 0.4
MPS = change in savings/ change in income
0.4 = change in savings/ 10
Change in savings = 4
Note
Sometimes in Question, it given that
equilibrium level of income falls short by 100
It means, Change in income =100 in following formula
k = Change in Income/Change in Investment
Example 7.
In an economy, the equilibrium level of income falls short by ₹ 500 crores. Calculate he additional investment needed to achieve the equilibrium level of income, if 80% of increased Income is spent on consumption.
View answer
In this question, we are given that
80% of increases income is spent on Consumption
It means
Change in Consumption/Change in Income =80%
MPC=80%
MPS=0.8
Also, it is given that
equilibrium level of income falls short by 500 crores
It means, Change in income = 500 in following formula
k = Change in Income/Change in Investment
k = 500/Change in Investment
1/1-MPC = 500/Change in Investment
1/1-0.8 = 500/Change in Investment
1/0.2 = 500/Change in Investment
Change in Investment *1=500*0.2
Change in Investment =100
Additional Investment=100
Sometimes in Question
2 Equilibrium Level of Income are given
Suppose they are Rs 6000 and Rs 7000
In this case,
Change in Income =7000-6000=1000
This Change in income is to be taken while calculating equilibrium Level
Example 10.
In an economy, marginal propensity to consume is 0.75. If Investment expenditure is increased by ₹ 500 crores, calculate the total increase in income and consumption expenditure.
MPC = 0.75
Change in Investment = 500
Change in Income = ?
Change in Consumption = ?
View answer
K = 1/1 - MPC
K = 1/1-0.75 = 1/0.25 = 4
K = Change in Income/ Change in Investment
4 = Change in Income/ 500
Change in Income = 2000
MPC = Change in Consumption/ Change in income
0.75 = Change in consumption/ 2000
Change in Consumption = 1500
Example 11.
An increase of ₹ 200 crore in investment leads to a rise in national income by ₹ 1000 crores. Find out marginal propensity to consume.
Change in investment = 200
Change in income = 1000
MPC =?
View answer
K = Change in Income/ Change in Investment
K = 1000/ 200
K = 5
K = 1/ 1-MPC
5 = 1/1-MPC
1-MPC =1/5
1-0.2 = MPC
MPC = 0.8
Example 12.
As a result of increase in investment by ₹ 125 crores, national income increase by
₹500 crores. Calculate marginal propensity to consume.
Change in Investment = 125
Change in Income = 500
MPC = ?
View answer
K = Change in Income/ Change in Investment
K = 500/ 125
K = 4
K = 1/ 1-MPC
4 = 1/1-MPC
1-MPC =1/4
1-0.25 = MPC
MPC = 0.75
Example 13.
In an economy, investment is increased by Rs 300 crore. If marginal propensity to consume is 2/3, Calculate increase in national income.
Change in Investment = 300
MPC = 2/3
Change in Income = ?
View answer
K = 1/ 1-MPC
K = 1/1-2/3
K = 3
K = Change in Income/ Change in Investment
3 = Change in Income/ 300
Change in Income = 900
Example 14.
If marginal propensity to consume is 0.9, what is the value of multiplier? How
much investment is needed, if national income increases by ₹ 5,000 crores?
MPC = 0.9
K = ?
Change in income = 5000
Change in Investment = ?
K = 1/ 1-MPC
K = 1/ 1-0.9
K = 1/0.1
K = 10
K = Change in Income/ Change in Investment
10 = 5000/ Change in Investment
Change in Investment = 5000/10
Change in Investment = 500
Example 16.
In an Investment 75 percent of the increase in income is spent on consumption Investment is increased by Rs 1,000crore. Calculate:(a)total increase in income;(b)total increase in consumption expenditure.
MPC =0.75
Change in Investment = 1000
a) change in income
b) Change in consumption
View answer
(a)
K = 1/ 1-MPC
K = 1/ 1-0.75
K = 1/0.25
K = 4
K = Change in Income/ Change in Investment
4 = Change in Income/ 1000
Change in Income = 4000
(b)
MPC = change in consumption/ change in income
0.75 = change in consumption/ 4000
change in consumption = 3000
Example 17.
An increase of ₹ 250 crores in investment in an economy resulted in total increase in income of ₹ 1,000 crores. Calculate the following:
(a) Marginal propensity to consume (MPC),
(b) Change in Saving,
(c) Change in consumption expenditure,
(d) Value of multiplier.
Change in investment = 250
change in income = 1000
a MPC = ?
b Change in savings = ?
c change in consumption = ?
d K = ?
View answer
a)
K = 1/ 1- MPC
K = Change in income/ change in investment
1/ 1 - MPC = Change in income/ Change in investment
1/ 1-MPC = 1000/250
1/ 1-MPC = 4
1/4 = 1 - MPC
MPC = 1- 0.25
MPC = 0.75
b)
MPC + MPS = 1
MPS = 1 - 0.75
MPS = 0.25
MPS = change in savings/ change in income
0.25 = change in savings/ 1000
change in savings = 250
c)
MPC = change in consumption/ change in income
0.75 = change in consumption/ 1000
change in consumption = 750
d)
K = Change in income/ change in investment
K = 1000/ 250
K = 4
Example 18.
In an economy, income increases by 10,000 as a result of a rise in investment expenditure by 1,000 calculate;
(a)Investment Multiplier;
(b)Marginal Propensity to consume.
View answer
a)
K = Change in income/ change in investment
K = 10000/ 1000
K = 10
b)
K = 1/ 1-MPC
10 = 1/ 1-MPC
1 - MPC = 1/10
MPC = 1 - 0.1
MPC = 0.9
Example 19
In an economy, an increase in investment leads to increase in national income which is three times more than the increase in investment. Calculate marginal propensity to consume.
View answer
Suppose Increase in Investment =x
Increase in Income
is 3 times more than increase in investment
= x+3x
=4x
Now, we know that
k=Increase in income/Increase in Investment
K = 4x/x
K = 4
K = 1/ 1-MPC
4 = 1/ 1-MPC
1 - MPC = 1/4
MPC = 1 - 0.25
MPC = 0.75
NCERT Questions
No questions in this part
Other Books
Question 1
How is Investment Multiplier related to MPC?
View answer
Investment Multiplier is the ratio of Increase in National Income(Y) due to Increase in Investment (I)
We know that
K = Investment Multiplier = Change in Income/Change in Investment
Also
MPC = Marginal Propensity to Consume = Change in Consumption/Change in income
Y = C + S
Replacing S with I
Y = C + I
Hence
Delta Y = Delta C+ Delta I
Dividing whole equation with Delta Y
Question 2
Calculate the value of multiplier, if MPC is:
(i) 0.6
(ii) 0.5
View answer
K = 1/1-MPC
(i)
K = 1/ 1 - 0.6
K = 1/ 0.4
K = 2.5
(ii)
K = 1/ 1-0.5
K = 1/0.5
K = 2
Other Books
Question 3
How much additional income will be generated in an economy with an additional investment of Rs 100 crores and when half of increase in income is spent on consumption?
Change in Investment = 100
MPC = 0.5
Change in Income = ?
View answer
K = 1/1 - MPC
K = 1/1 - 0.5
K = 1/0.5
K = 2
K = change in income/ change in investment
2 = change in income/ 100
change in income = 200