Question

From the following data, calculate Investment Multiplier and Equilibrium Level of Income in the economy: 
Change in Initial Investment ($\Delta I$) = ₹1,000 crore Marginal Propensity to Save (MPS) = 0.5 Autonomous Consumption ($c$) = ₹50 crore Planned Investment = ₹100 crore

Hint:

To calculate the income multiplier, we need to analyse the data i.e, Initial income, MPS, Autonomous Consumption and Investment.

Answer 1

Given: $\Delta I = 1,000 { crore}$ ${MPS} = 0.5$ ${Autonomous Consumption} (c) = 50 { crore}$ ${Planned Investment} = 100 { crore}$  % Investment Multiplier Calculation 
(a) Calculation of Investment Multiplier: \[ k = \frac{1}{MPS} \] \[ k = \frac{1}{0.5} = 2 \] Thus, the Investment Multiplier ($k$) is 2.  % Equilibrium Income Calculation 
(b) Calculation of Equilibrium Level of Income: The equilibrium level of income ($Y$) is determined using the formula: \[ Y = C + I \] Where: \[ C = c + MPC \times Y \] Since $MPC = 1 - MPS = 1 - 0.5 = 0.5$, and $I = 100$ crore, \[ Y = 50 + 0.5Y + 100 \] \[ Y - 0.5Y = 150 \] \[ 0.5Y = 150 \] \[ Y = 300 { crore} \] 
Conclusion: The equilibrium level of income in the economy is ₹300 crore.