Relation between Investment Multiplier k and MPS
Example 2.
Calculate the value of multiplier if the MPS is:
(a) 0.40;
(b) Equal to MPC
View answer
(a) MPS = 0.40
Also,
MPS = 1 - MPC = 0.40
K = 1/1 - MPC
K = 1/0.4
K = 2.5
(b) In this case, we are not given value of MPS directly
It is given that
MPC=MPS
Also. we know that
MPC+MPS=1
MPS+MPS=1
2MPS=1
MPS=1/2=0.5
Now, we can calculate K
K = 1/MPS
K = 1/0.5
K = 1*10/5
K = 2
Example 9.
Calculate MPS and Multiplier (k) from the following data:
| Income (Rs) | 100 | 200 |
| Saving (Rs) | 40 | 100 |
View answer
In this question,
Change in Income=200-100=100
Change in Savings =100-40=60
MPS=Change in Savings/Change in Income
= 60/ 100
= 0.60
K = 1/mps
K = 1/ 0.6
K = 1.67
Example 6.
In an economy, the actual level of income is ₹ 500 crores, whereas, the full
employment level of income is ₹ 800 crores. If one-fourth of additional income is saved, calculate
increase in investment required to achieve full employment level of income.
View answer
In this question, it is given that
1/4 of Additional Income is Saved
It means, MPS=1/4=0.25
Now we know that
K=1/mps
K*MPS=1
K=1/MPS
K=1/0.25=1*100/25=100/25=4
Also ,it is given in question that
Actual Level of Income =500 Crores
Full Employment level of Income =800 Crores
Change in income =300
We know that
Change in Income/Change in Investment =k
300/ Change in Investment = 4
300/ 4 = Change in Investment
Change in Investment = 75
Increase in investment required is Rs75 crores
Example 8.
In an economy, the equilibrium level of income is ₹ 12,000 crore. The ratio of marginal propensity to consume and marginal propensity to save is 3:1. Calculate the additions investment needed to reach a new equilibrium level of income of ₹ 20,000 crore.
View answer
In this question,2 equilibrium level of income are given
Current equilibrium Level of Income =12000
New equilibrium Level of Income =20000
Change in Income =8000
Also, it is given in question that
MPC and MPS are in ratio of 3:1
It means
MPC=3 *MPS
Now, we know that
MPC+MPS=1
3*MPS+MPS=1
4MPS=1
MPS=1/4=0.25
Now, lets calculate k
K=1/mps
K=1/0.25=1*100/25=100/25=4
We know that
Change in Income/Change in Investment =k
8000/ Change in Investment = 4
Change in Investment = 8000/ 4
Change in Investment = 2000
An additional investment of Rs 2000 crores is required
Example 20.
In an economy, with every increase in income, 10 per cent of the rise in income is saved. Suppose a fresh investment of ₹ 120 crores takes place in the economy. Calculate the following:
(i) Change in the income;
(ii) Change in consumption.
View answer
We know that
MPS means Marginal Propensity to Save
It is ratio of Change in Saving to Change in Income
Now, it is given that
With every increase in Income, 10% of rise in Income is Saved
It means, MPS = 10% = 0.10
Also ,we are given that
Change in Investment = K
Now, Lets calculate K
K = 1/MPS
=1/0.10
=1*10/1
=10
Now, we know that
k=Change in income/Change in Investment
10=Change in Income/120
10*120=Change in Income
Change in Income=1200
Now, we have to calculate Change in Consumption
For this ,we first calculate MPC
MPC+MPS=1
MPC = Change in Consumption /Change in Income
=Delta C /Delta Y
NCERT Questions
No questions in this part
Other Books
Question 1
How is Investment Multiplier related to MPS?
View answer
Investment Multiplier is the ratio of Increase in National Income(Y) due to Increase in Investment (I)
We know that
MPC+MPS=1
MPS=1-MPC
Now we know that
K = 1/1-MPC
K = 1
MPS
Note
K and MPS have Inverse Relation
If MPC increases, K Decreases
IF MPS Decreases, K increases
Question 2
MPS = 0.25
Calculate value of Multiplier
View answer
K = 1/1-MPC
K = 1/MPS
K = 1/ 0.25
K = 4