Answer to Question #94131 in Macroeconomics for Ria

Question

Assume the following information is given about an economy:
Marginal propensity to consume (mpc) = 0.50
Marginal propensity to tax (mpt) = 0.10
Marginal propensity to import (mpm) = 0.30
Investment injection = $100 million

(i) Calculate the value of the multiplier. (5)
(ii) Calculate the change in equilibrium level of national income. (5)

Answer 1

Multiplier - coefficient showing the dependence of gross product changes on investment changes.

With an increase in investment, gross product will grow much more than the initial cash investment.

Keynes's multiplier, or investment multiplier, is a coefficient equal to the reciprocal of the marginal propensity to save.

 multiplier = 1/ Marginal propensity to consume = 1/0.50=2.

multiplier = 2, i.e., every dollar invested in investments will give 2 dollars of growth in equilibrium level of national income.