Question

Suppose, the consumption function is given as:
\[ C = 205 + 0.9Y \quad \text{(where C = Total Consumption and Y = National Income)} \]
The value of Investment Multiplier (K) would be ................
(Choose the correct option to fill in the blank)

• A. 0.09
• B. 10.0
• C. 0.9
• D. 9.0

Hint:

The higher the Marginal Propensity to Consume (MPC), the higher the multiplier. Always use the formula:
\[ K = \frac{1}{1 - MPC} \] Autonomous consumption does not affect the multiplier value.

Answer 1

The Correct Option is B

To calculate the Investment Multiplier (K), we use the formula based on the Marginal Propensity to Consume (MPC):
\[ K = \frac{1}{1 - MPC} \]
From the given consumption function:
\[ C = 205 + 0.9Y \]
Here, 205 is the autonomous consumption, and the coefficient of \( Y \), i.e., \( 0.9 \), is the Marginal Propensity to Consume (MPC).
So, we have:
\[ MPC = 0.9 \]
Now, applying the value of MPC in the multiplier formula:
\[ K = \frac{1}{1 - 0.9} = \frac{1}{0.1} = \boxed{10.0} \]
Thus, the correct value of the investment multiplier is 10. This means that for every unit increase in investment, the national income increases by 10 units.