Question

the equilibrium level of income is R17000m. The full-employment income is R22000m and the marginal propensity to consume is 0,8. By how much should the investment expenditure change to bring national income to full-employment equilibrium

Answer 1

Given : MPC = 0.8

$Investment multiplier = 1/(1-0.8)$

Investment Multiplier = 5

The equilibrium level of income is Rs 17,000 million while the full-employment level of income is Rs 22,000 million.

Addition to the income is 22,000 - 17,000 = Rs 5,000 million.

Additional investment can be found by the formula,

$5 =5000/I$

I = Rs 1,000

The investment expenditure has to be increased by Rs 1,000 million to bring the national income to the full employment level.