Question

Suppose for a hypothetical economy: 
\(C = 100 + 0.75Y\) (where \(C\) = Consumption and \(Y\) = Income) 
\(I_0 = 400\) (\(I_0\) = Autonomous Investment) 
Value of Investment Multiplier (\(K\)) would be ____________ . 
 

• A. 5
• B. 4
• C. 6
• D. 3

Hint:

Use the formula \(K = \frac{1}{1 - MPC}\) and substitute the value of \(MPC\) given in the question.

Answer 1

The Correct Option is B

The investment multiplier (\(K\)) is calculated as: \[ K = \frac{1}{1 - MPC} \] where \(MPC\) (Marginal Propensity to Consume) is \(0.75\). Substituting: \[ K = \frac{1}{1 - 0.75} = \frac{1}{0.25} = 4 \]