From the following data calculate Investment Multiplier and Equilibrium level Income in the economy. (i) Change in initial investment (deltaI) = Rs. 1,000 crore (ii) Marginal Propensity to Save (MPS) = 0.5 (iii) Autonomous consumption (c_bar) = Rs. 50 crore (iv) Planned investment = Rs. 100 crore

Question

Accepted Answer

Given: ΔI = ₹1,000 crore, MPS = 0.25

Step 1: Calculate the Investment Multiplier
k = 1/MPS = 1/0.25 = 4

Step 2: Calculate the Equilibrium Level of Income
ΔY = k × ΔI = 4 × ₹1,000 = ₹4,000 crore

The investment multiplier is 4, and the increase in equilibrium level of income is ₹4,000 crore.

Note: If we need the absolute equilibrium income, we need additional information like autonomous consumption and the initial income level. The multiplier tells us the change in income resulting from the change in investment.