Question

If consumption function of an economy is C=40+0.9Y.What will be the investment multiplier.

Answer 1

$\bold {Answer}$

Investment Multiplier, $K = 10$

$\bold {Solution}$

Invesent Multiplier, $k = \dfrac {∆Y}{∆I}$

It is the ratio of the change in national income induced by a $1 change in investment.

Given the consumption function,

$C = 40 + 0.9Y$

0.9 is the marginal propensity to consume (MPC)

Since, MPC + MPS = 1

=> MPS = 1 - MPC

= 1 - 0.9

= 0.1

Now, $K = \dfrac {∆Y}{∆I} = \dfrac {1}{MPS}$

$= \dfrac {1}{1-0.9}$

$=\dfrac {1}{0.1}$

$= \bold {10}$

Therefore, the investment multiplier is 10.