Question

In an economy, the equilibrium level of income is Rs 12000. The ratio of MPC to MPS is equal to 3:1. Calculate the additional investment required to reach a new equilibrium level of income of Rs 20000.

Answer 1

MPC = 3/4 = 0.75 

MPS=1/4 = 0.25 

K = 1/MPS = 1/0.25 = 4 

K=(ΔY)/(ΔI) 

→ ΔI = 8000/4 [As ΔY=20000-12000=8000] 

= 2000