0
$\begingroup$

I recently encountered upon this question:

Suppose, in an economy,autonomous consumption is Rs 100 crore and autonomous investment is Rs 60 crore. Imagine that in this economy,with every increase in income 80 °/° of it is spent on consumption . If the full employment level of income is Rs 1000 crore,what will be the additional investment?

So, the MPC is 0.8 and so the multiplier would be 5 times. The consumption function is C = Autonomous consumption + MPC.y Hence, C = 100 + (0.8)1000 = 900 crore. But then given that the multiplier is the ratio change in income to change in investment, how to proceed further?

|improve this question
$\endgroup$
0
$\begingroup$

I think you use the inverse (1-MPC) of the MPC to derive the marginal propensity to save (MPS) and create the investment function. So, I= 60 + .2*1000 = 260, or an additional 200 from the autonomous level.

|improve this answer
New contributor
Danny Coveney is a new contributor to this site. Take care in asking for clarification, commenting, and answering. Check out our Code of Conduct.
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.