Income determination and multiplier question
Solution:
(a) Investment multiplier or simply 'multiplier' implies that any change in the investment leads to a corresponding change in the income and output by multiple times.
The minimum value of the multiplier can be 1 when MPC= 0 and the maximum value of the multiplier can be infinity when MPC = 1.
(b) We know, C = C (bar) + cY and Y = C + I
So,
4,000 = 1,000 + c(4000) + 70
3000-70 = c(4000)
2930/4000 = c
c or MPC = 0.73
So MPS = 1 - MPC = 1 - 0.73 = 0.26
Accordingly, k = 1/MPS = 3.84
(a) Investment multiplier or simply 'multiplier' implies that any change in the investment leads to a corresponding change in the income and output by multiple times.
The minimum value of the multiplier can be 1 when MPC= 0 and the maximum value of the multiplier can be infinity when MPC = 1.
(b) We know, C = C (bar) + cY and Y = C + I
So,
4,000 = 1,000 + c(4000) + 70
3000-70 = c(4000)
2930/4000 = c
c or MPC = 0.73
So MPS = 1 - MPC = 1 - 0.73 = 0.26
Accordingly, k = 1/MPS = 3.84