Question

Calcualte the additional investment needed if the equilibrium level of income falls short by Rs. 1,000 crores . It is given that consumption function is given as: C `=120+0.8Y.`

Answer 1

We know, Consumption function is expressed as : C `=overlinec + b(Y).` It means: 0.8 indicates MPC, i.e. MPC `=0.8.`
Multiplier (k) `=(1)/(1-MPC)=(1)/(1-0.8)=5`
We also know: Multiplier (k) `=("Change in Income"(DeltaY))/("Change in Investment"(Deltal))`
Given: Change in Income `(DeltaY) =Rs.1,000` crores
`5=(1,000)/("Change in Investment"(Deltal))`
Additional Investment Needed `=Rs.200` crores